Society for Institutional & Organizational Economics
We study how corporate ownership shapes the firms’ likelihood of being involved in antitrust indictments. Using data from Italy, we show that family-owned firms are less likely than firms with any other ownership structure to commit antitrust violations. To achieve identification, we exploit a law change that made it easier to transfer family control. Studying the mechanisms at play, we find that family firms are especially less likely to commit antitrust violations when they feature a more prominent size relative to the city of headquarter, which magnifies reputational concerns. Next, using a difference-in-differences setting we show that family firms involved in antitrust violations appoint more family members in executive positions in the aftermath of the indictment. Moreover, these firms invest less and curb equity financing as compared to nonfamily firms. Collectively, our findings suggest that family control wards off reputational damages but at the same time it weakens the ability to expand in order to keep up with fiercer competition following the dismantlement of an anticompetitive practice.
Standard-setting organizations (SSOs) are collectively self-governed industry associations, formed by innovators and implementers. They are the main organizational form to agree on and manage technical standards, and form the foundation for many technological and economic sectors. Constructing a model, we study the incentives of heterogeneous innovators and implementers to join an SSO, which is endogenously formed. We also study the effect of SSO governance on membership incentives and on members' lobbying efforts to get their technologies included in the standard. We show that, depending on parameter realizations, one of four equilibrium types arises uniquely. The results can reconcile existing evidence, especially that many SSO member firms are small. We show that raising the influence of implementers within the SSO increases the standard's market coverage and lowers royalty rates but it erodes the innovators' incentives to contribute to the standard. This results shows how the incentives of both type of firms are conflicting within an SSO and need to be carefully weighted for it to be successful.
How do the media influence local institutions? We explore the question by looking at how acquisitions of local TV stations by a large broadcast group affect U.S. municipal police departments. To capture variations in local media, we implement a triple differences-in-differences design which exploits the staggered acquisition of local TV stations by the Sinclair Broadcast Group 2010-2017, together with cross-sectional variation in whether municipalities tend to be covered by local news at baseline. First, using a newly collected dataset of transcripts of 300,000 local newscasts, we document that once acquired by Sinclair, local TV stations decrease local crime news coverage. Second, we find that after Sinclair enters a media market, municipalities that were likely to be in the news at baseline experience 8% lower violent crime clearance rates with respect to municipalities that were very rarely in the news. Our preferred interpretation is that the change in content induces police officers to decrease the effort allocated to cleaning violent crimes. We show that this reduction in police effort is not explained by underlying changes in crime rates but, rather, by a decrease in the importance and salience of crime as a topic in the public opinion.
This Article comprehensively examines the importance of director networks to corporate governance. Using qualitative and quantitative data, the Article uncovers the importance of director networks to corporate governance and the implications that network theory poses for the study of corporate law. In doing so, the Article tackles an understudied corner of corporate decision-making at a critical time, when directors have an outsized influence over their companies and in many cases, the United States economy as a whole. This Article builds on a robust literature in corporate governance and decision-making. Much of the existing scholarship has focused on whether directors—especially “busy directors” who serve on multiple boards—are meeting investors’ and regulators’ expectations. However, the literature overlooks an important aspect of busyness, that when directors serve on multiple boards, they also build a social network that extends beyond the companies they serve, spanning several degrees of separation. This Article shows how these broader connections affect corporate governance, making three contributions to the literature. First, it identifies the significance of network theory to contemporary corporate governance discourse and develops a theoretical framework to better account for directors’ service on multiple boards. Second, it empirically examines the direct impact that director networks have on the governance of public firms. It does so through an original data set that reveals some of the positive effects that director networks have on companies’ governance and further demonstrates how network analysis adds important insights to existing empirical studies regarding director service on multiple boards. Finally, the Article suggests that the current discourse by regulators, institutional investors, and academics may underestimate the importance that director networks have for companies. It then suggests several policy reforms to address these findings.
We use individual-level data to shed light on the evolution of founder-CEO compensation in venture capital-backed startups. We document that having a tangible, marketable product is a fundamental milestone in CEOs' compensation contracts, marking the point at which liquid cash compensation begins to increase significantly -- well before a liquidity event. "Product market fit'' also coincides with key human capital in the startup becoming more replaceable, marking an apparent transition in the firm's lifecycle from "differentiation" to "standardization". Although substantial increases in cash compensation for founder-CEOs in response to milestones improves the certainty equivalent of attempting entrepreneurship relative to flat pay, low cash compensation in the very early years can still deter entrepreneurship for potential entrants. We characterize the types of individuals most likely to be impacted by this constraint and hence those whose ideas are unlikely to be commercialized through VC-backed entrepreneurship.
This paper considers a moral hazard model with (i) a risk-neutral agent and (ii) limited liability. Prior to interacting with the principal, the agent can choose the production technology, which is a specification of the agent's cost of generating each output distribution with support in [0,1]. After observing the production technology, the principal offers a wage scheme and then the agent implements a distribution over outputs. First, we show that it is without loss to restrict attention to binary distributions on [0,1], that is, the cost of any other distribution is prohibitively high. Then, we characterize the equilibrium technology defined on the binary distributions and show that the equilibrium payoffs of both the principal and the agent is 1/e. A notable feature of the equilibrium is that the principal is indifferent between offering the equilibrium bonus rewarding output one and anything less than that.
For almost 40 years, top income inequality has increased sharply in the US. At the same time, there have been major improvements in automation technology. It is well-known the top income is well approximated by a Pareto distribution. In this paper, we provide a theory that links automation technology to the Pareto tail of the income distribution. We construct a model in which the span of control is defined by the measure of labor used in production. We model this as a convex cost of labor, and it generates a decreasing returns to scale production function. An improvement in automation enables entrepreneurs to substitute labor with capital and it decreases the severity of diseconomies of scale. This leads to higher returns to entrepreneurial skills, to a decrease in the Pareto parameter and to an increase in top income inequality. We rationalize the convex cost of labor using a theory of efficiency wages. Using cross-industry and cross-country data, we provide evidence that there is a significant correlation between automation and the top income inequality.
We study the effect of a subsidy to land purchases by non-profits in views of creating natural reserves. A simple theoretical model finds that while the subsidy makes prices soar in the short run, the effect does not persist in time and prices decline in the long run. We suggest that this happens because the subsidy releases resources for the non-profits that allow them to exert more effort negotiating prices and stimulating supply, effectively driving prices down. We test this prediction empirically using first-hand collected notarial data from Belgium and exploiting the structural break created by the introduction of the subsidy. Using an estimation method robust to outliers, we provide a methodological contribution in the analysis of markets with quasi-donations. The method is relevant for markets of goods with patrimonial value where some sellers are willing (or are persuaded) to donate their assets for the common good.
Do organizations in governmental and in private, for-profit ownership make different strategic decisions in predictable directions? Hart et al. (1997) constructed a model to answer this question but a conclusive empirical answer is still missing. We analyze a unique data set containing information on quality indicators, inputs, and organizational form of all German hospitals. Our preliminary results confirm the link hypothesized by Hart et al. between lower cost and lower service quality. However, we have to refute the idea that private hospitals focus on cost cutting. Our results suggest the opposite: private hospitals focus on high-quality production. As high quality requires more health personnel, private hospitals also incur higher cost of production than public hospitals.
Economists have offered several incentive- and risk-based rationales for academic tenure as well as a few attempts to explain the role of faculty in university governance. Missing from the literature, however, is an explanation for why the reputational forces and standard contracting practices relied on in private sector employment relationships are not adequate for addressing incentive problems in academia. Relationship-specific investments do not seem to provide an answer: For the most part, neither teaching nor research is specific to any particular institution. This paper argues, first, that the source of commitment problems in academia lies in the combined research and non-research responsibilities of faculty: The sacrifice of research time today affects the earning potential of faculty over the rest of their career, the size and timing of compensation for which present the same problems posed by relationship-specific investments in other settings. The argument explains why academic tenure and faculty governance did not become prominent features of U.S. colleges and universities until the emergence of research as a primary function of higher education institutions toward the beginning of 20th century; and why both tenure and governance rights are generally restricted to “regular” faculty who perform both teaching and research. The paper then combines data on faculty authority over personnel decisions at over 1,000 U.S. colleges and universities and publication data going back to 1900 to show that faculty authority over hiring, promotion, and dismissal decisions is strongly associated with both the quantity and types of research produced.
This paper considers the effect of firm’s organizational capacity – proxied by structured management practices - on tax planning behavior of multinational firms (MNEs). Management practices improve productivity and hence should increase taxable corporate income of firms. However, higher adoption of management practices may also enable tax planning. Using a pooled cross-sectional dataset, we show that MNEs operating in low-tax countries exhibit a positive relationship between reported profits and structured management practices, while no discernible relationship exists for MNEs operating in high-tax countries. Using an event study design, we find that firms with more structured management are also more responsive to corporate tax rate changes. These patterns are consistent with the shifting of profits out of high-tax locations into low-tax locations. This adds a novel explanation for why some firms are more likely to engage in aggressive tax planning, with implications to the cost-benefit analysis of government-funded management upgrading projects.
Analyzing data from approximately 1.5 million employees across 1,100 established public and private US companies, we find that the strength of employee beliefs about their firm’s purpose is lower in public companies. This difference is most pronounced within the salaried middle and hourly ranks, rather than senior executives. Among public companies, purpose becomes progressively lower with more concentrated shareholders, especially among firms with high hedge fund ownership. These patterns can be partly explained by differences in CEO backgrounds and compensation: public firms, particularly those with strong shareholders, choose outsider CEOs at higher rates and pay them more relative to their employees. Our analyses suggest that these results are not driven solely by sorting effects, but appear attributable in part to the impact that firm owners have on their employees. In summary, shareholders appear to influence the strength of corporate purpose deep within organizations via the leadership and corporate practices they enable at the top.
We provide the first large-scale empirical evidence on the link between firm strategy and the uptake and performance of “structured” management practices. Working with the U.S. Census Bureau, we developed a novel measure of strategic commitment to flexibility versus efficiency at the production-unit level. Evidence from over 30,000 establishments in the U.S. manufacturing sector reveals that heretofore-unobserved process strategy decisions help explain variation in the adoption of structured management, even within the same firm. Performance of these practices is also contingent on the degree of strategy-practice alignment: plants that deviate from an empirically-derived measure of fit suffer significantly lower productivity. Among many possible drivers of misalignment, unionization and peer effects are associated with greater strategy-practice misalignment. These findings draw attention to critical contingencies that should inform measurement and research at a time of fast-growing interest among academics, practitioners, and government agencies.
We document behavioral reference-point effects in a personnel-economic context. Analyzing both survey data and administrative social-security records, we show that wage perceptions are subject to substantial discontinuities. Particularly, earning slightly below or slightly above salient wage thresholds (namely multiples of EUR 1,000 in the monthly gross wage) has markedly different effects on employee satisfaction, job loyalty, and employee effort. This has important consequences for human-resource management (HRM), as the documented behavioral bias must be taken into account when incentivizing employee behavior.
We study monitoring and manipulation in a dynamic career concerns model. An agent manipulates for a private benefit and is punished when a monitor detects the manipulation. The monitor's detection ability is uncertain and requires investment to maintain. By manipulating, the agent experiments about the monitor's ability and this experimentation motive encourages manipulation. Absent detection, the belief about the monitor's ability decreases, which increases the agent's willingness to manipulate, but discourages the monitor from investing in her ability. In equilibrium, the monitor lets her ability decay, even though she could prevent manipulation forever. Surprisingly, the monitor's investment encourages manipulation. The relationship is generally inefficient and there are multiple equilibria in which the monitor over-invests. Term limits reduce manipulation by curbing the agent's experimentation motive and long-serving monitors start accepting bribes to hide detections. The optimal organizational design exploits externalities between multiple manipulating agents.
When partnerships come to an end, partners must find a way to efficiently reallocate the commonly owned assets to those who value them the most. This requires that the aforementioned members possess enough financial resources to buy out the others’ shares. I investigate ex post efficient partnership dissolution when agents are ex post cash constrained. I derive necessary and sufficient conditions for ex post efficient partnership dissolution with Bayesian (resp. dominant strategy) incentive compatible, interim individually rational, ex post (resp. ex ante) budget balanced and ex post cash-constrained mechanisms. Ex post efficient dissolution is more likely to be feasible when agents with low (resp. large) cash resources own more (resp. less) initial ownership rights. Furthermore, I propose a simple auction to implement the optimal mechanism. Finally, I investigate second-best mechanisms when cash constraints are such that ex post efficient dissolution is not attainable.
Economists and management scholars have argued that the scope of incentives to increase cooperation in organizations is limited as their use signals the prevalence of free-riding among employees. This paper tests this hypothesis experimentally, using a sample of managers and employees (N = 449) from a large software company. In the experiment, I exogenously vary whether managers are informed about prevailing cooperation levels among employees before they can set incentives to promote cooperation. Comparing informed versus uninformed incentive choices, the data reveals strong positive effects of incentives that are unaffected by the hypothesized signaling effect. The absence of such effect seems related to the perception of managers’ intentions, a mitigating factor that has not been explored in the literature so far.
Internal crowdsourcing, a peer-based approach to innovation, has great potential for organizations. Yet, as we show, the tensions between organizational hierarchy and peer-based crowdsourcing can create barriers for employee engagement. In their search for incentives to overcome these barriers, should organizations use incentives that are congruent with their established hierarchical structures, or should they use incentives that are aligned with the aspirational, peer-based approach to innovation? We partnered with NASA for a qualitative study and a field experiment (N=7,455). First, we show that concerns about the legitimacy of platform engagement disincentivize employees. Second, we find that managerial recognition, the incentive that is congruent with the established hierarchy, significantly increases platform engagement. It does so by alleviating legitimacy concerns and by offering managerial attention. Peer recognition, which is congruent with the peer-based approach to innovation, is not found to have a significant overall effect. However, workers who are otherwise less visible were positively motivated by it.
We study how firm investment policies and the allocation of capital are shaped by managerial incentives. Using the introduction of an accounting reform in the U.S. as a quasi-natural experiment that effectively shortened the horizon of managerial incentives for some firms (FAS 123R) we present reduced form empirical evidence on the relation between managerial incentives and firm investment policies. Based on a within-firm estimator that uses variation across investments with different durabilities, we find evidence that firms with more short-term incentives systematically shift their expenditures towards investments with a shorter durability and lower the durability of firms' capital stock. To rationalize the empirical findings and to quantify the impact of incentive distortions on output, investment and misallocation we then build a dynamic model of firm investments in which managers determine investment policies. We show that equity-based compensation contracts can induce managers to make investment decisions corresponding to quasi-hyperbolic time preferences such that there is systematic overinvestment in assets with shorter durability. The model illustrates that the relatively small deviations in managerial incentives caused by the accounting reform lead to substantial output and investment distortions within and across firms.
Absenteeism in the workplace entails economic consequences of considerable magnitude. Yet, evidence regarding the effectiveness of potential instruments that firms may employ in order to curb excessive absenteeism is scarce. We conduct a firm level field experiment (RCT) in collaboration with a retail chain and introduce two variants of an attendance bonus, which we randomly assign among the firm’s apprentices. While one group of apprentices receives a monetary bonus, another group receives a time-off bonus in the form of additional days of vacation. A third group serves as the control group. Our analyses reveal that neither of the two bonus variants serves to reduce absenteeism. Instead, we find that the monetary attendance bonus even tends to increase the probability of absence, notably for the cohort of first year apprentices. The time-off bonus, on the other hand, does not appear to systematically affect attendance behavior at all. The results of a comprehensive survey suggest that the monetary attendance bonus relaxes the apprentices' psychological costs of absence.
We study the effects of higher monetary incentives paid to frontline service providers and their impact on the take up of a new savings technology. The context is one of a large bank that hires local branchless banking agents to introduce a new savings account in a rural and largely unbanked area of Indonesia. These agents are (a) randomized into receiving a high vs. low piece rate for recruiting new customers, and (b) randomized into whether or not the piece rate is revealed to the community. We shed light on the supply- and demand-side effects of monetary incentives. we find that they are effective in increasing take-up only in settings where the information about the agent’s compensation is kept private. On the other hand, when these high incentives are public information, they convey a negative signal about the quality of the product, the agent, or the bank to potential clients, reducing the demand for the product. The effect is of the same magnitude as the supply side effect.
How can non-profit organizations improve their governance to increase their social impact? This study examines the effectiveness of a bundle of governance mechanisms (consisting of pro-social incentives and auditing) in the context of a randomized governance program conducted in the Democratic Republic of Congo’s healthcare sector. Within the program, a set of health centers were randomly assigned to a governance treatment while others were not. We find that the governance treatment leads to i) higher operating efficiency and ii) improvements in social performance (measured by a reduction in the occurrence of stillbirths and neonatal deaths). Furthermore, we find that funding is not a substitute for governance—health centers that only receive funding increase their scale, but do not show improvements in operating efficiency nor social performance. Overall, our results suggest that corporate governance plays an important role in achieving the non-profits’ objectives and increasing the social impact of the funds invested.
Informational constraints are often a crucial barrier to adopt surplus-enhancing innovations in firms in developing countries. How can the culture in firms be changed to overcome this barrier and to increase upward flows of ideas as an important source of innovation? We conduct a randomized controlled trial in one Bangladeshi garment factory to test the efficacy of voice-enhancing interventions. The first intervention aims to reduce upward communication costs at the worker-level by randomly assigning workers to participate at lunch sessions with co-workers to think about ideas. The second intervention aims to reduce upward communication costs at the supervisor-level by randomly assigning supervisors to participate at a training program on how to increase workers' voices. Interim findings suggest that workers are better off as a result of a reduction in upward communication costs at the worker-level. I find evidence of positive effects on firm- and worker-related outcomes, i.e. higher job satisfaction, lower absenteeism and working time. A reduction in upward communication costs at the supervisor-level, through guidance from supervisors, shifts up the quality distribution of ideas and encourages workers to submit more meaningful ideas. However, it steers workers away from critical topics they would raise without any guidance, such as their supervisors’ misbehavior. As potential channels, I consider higher perceived efficacy and more confidence into upward communication of treated workers and supervisors.
The paper explores the joint determination of economic output, wages, corporate culture, employees' ethical standards and monitoring intensity in an analysis of organisational dysfunction. Economic activities are frequently accompanied by unethical and socially harmful activity, such as corruption, sexual harassment and environmental degradation. The ethical sensitivities of managers and their employees are shaped through their social interactions and thus organisational dysfunctions can arise. Such dysfunctions may be mitigated through changes in government policies or social norms. These changes become particularly effective if they encourage the managers and employees to adopt more ethical narratives. Narratives align managers' and employees' recognition of the social harm from unethical activities, determining their objectives and thereby their economic behaviours. The intersubjective quality of narratives means that policy interventions may either be amplified or counteracted by how discussion unfolds around the issue.
This paper studies organizational learning when incentives change. We first illustrate how imperfect information over the true shape of the production function affects worker’s effort choice over time as information is disclosed and processed. We then show that changes in the compensation schedule can trigger such learning process. We take this hypothesis to the data using personnel records from a Peruvian egg production plant. Exploiting a sudden change in the worker salary structure, we find evidence that workers learn from each other over the shape of the production function, and change their effort accordingly. This adjustment process is costly for the firm. Our study shows that lack of information over the global shape of the production function increases the cost for firms associated with changing the shape of incentives at the workplace.
We study the interaction between productive investment and persuasion activities in a principal-agent setting with strategic disclosure. In an attempt to persuade the principal, the agent diverts substantial resources from productive activities to information acquisition for persuasion, even though productive activities are more efficient and raise the chances of success in persuasion. We show that a higher cost of an investment project results in a lower productive investment. We further demonstrate how a commitment by the agent to disclose all acquired information, or a commitment by the principal to a decision rule, curtail the inefficiency and stimulate productive investment.
Cooperation among employees is crucial for the success of organizations but can unravel with size. We study cooperation in the context of a workplace safety methodology: workers are voluntarily enrolled and are trained to provide advice to co-workers on safe behavior. Using archival data, we show that while cooperation is useful in reducing accidents, it breaks down as the number of enrolled workers increase. We show that this is due to decreasing marginal rewards for the additional enrolled worker. This supports recent research that highlights the crucial role of marginal benefits in shaping the relationship between cooperation and size. Then, we manipulate the safety methodology in a field experiment by randomly structuring workers in groups. This produces a recovery of cooperative effort and a reduction in risky behavior and accidents. We show that the likely mechanism behind this recovery are repeated interactions among advisors and workers, rather than group identity or social control such as peer pressure or reputation. This result suggests that the core function of structure is not only grouping workers to favor the division of specialized labor –as emphasized in prior research–, but also to promote cooperation at scale.
Research on competitive behavior typically demonstrates that women are less likely to participate in competitions than men are. We show that this difference can be eliminated by changing the framing of a competitive task from a default where applicants must actively choose to compete to a default where applicants are automatically enrolled in competition but can choose to opt out. We provide experimental evidence that this choice architecture reduces gender disparities by affecting the perception of prevailing social norms about competition without negatively affecting performance or well-being, or decreasing the likelihood that a woman is selected for a job.
Delegation in hiring (DIH) is becoming a mainstream management practice among business chains worldwide, yet theoretical and empirical evidence of its effects remains scarce. DIH refers to the use of store managers to do their own recruiting, rather than relying on the headquarters human resource (HR) department. To estimate the impacts of DIH on employee recruitment, productivity, and firm performance, we partnered with a large Chinese firm with 111 retail stores on a 12-month field experiment. Results show that DIH increases both the mean and the variance of individual productivity, with an overall positive impact on store-level productivity by 7.1%. The growth in store-level performance is driven by both direct effects of recruiting higher-performing workers and indirect effects of positive spillovers from new to existing employees. Consistent with our theory, DIH achieves better outcomes in stores that have better incentives, larger shares of repeated customers, and that are less busy. To test the validity of our experiment, we find similar results from observational data on this firm and a second large multinational firm in the spa industry. Overall, this study illustrates the value of information held by local managers in hiring productive employees.
Telephone operation was one of the most common jobs for young American women in the early 1900s. Between 1920 and 1940, AT&T adopted dial service in over half of U.S. telephone exchanges, automating away a legion of operators. We show that upon a city's adoption of dial, the number of young women in subsequent cohorts working as telephone operators immediately and permanently dropped by 50-80%, accounting for 2% of this population's employment. However, the shock did not reduce future cohorts' employment: the decline in demand for operators was instead counteracted by employment growth in other middle-skill white-collar jobs like secretarial work and lower-skill service jobs. Using a new genealogy-based census linking method, we show that existing telephone operators were pushed out of the telephone industry and were more likely to either become operators at private switchboards or leave the labor force entirely. Conditional on working, displaced operators were slightly more likely to be in lower-paying occupations.
Why would firms hire dreamers, namely managers who overestimate the impact of their effort on product quality, given that this may lead to suboptimal choices? Is this related to the degree of product market competition? We answer these questions by studying the performance of dreamers under several market structures. A monopolistic firm always benefits from the dreamer's mistaken beliefs about the impact of his effort on quality by offering him a contract that entails a high bonus and a low fixed wage. Firms also hire dreamers in the presence of competition but they do not benefit from their availability. Since in equilibrium all firms hire dreamers to stay competitive in the market, total revenues are not affected by the managers' overoptimism, while monetary compensation positively depends on it. We also examine an environment in which there is competition for dreamers, i.e. there are more firms than overoptimistic managers, and firms have asymmetric production costs. When their hiring decisions are made simultaneously, efficient firms reinforce the existing competitive advantage by hiring dreamers. Conversely, under sequential offers, inefficient firms hire dreamers to catch up with the efficient firms.
This paper studies the productivity consequences of favoritism in employee promotions within organizations. Using data from public high schools in four Chinese cities, I first show that teachers with hometown or college ties to the school principal are twice as likely to be promoted, after controlling for characteristics on their application profiles and their value-added in teaching. I then use the results from a survey in which I asked teachers to select anonymous peers to promote from a pool of applicants applying for promotion to infer each teacher’s revealed fairness views regarding promotion qualifications. Contrasting these with actual past promotions in turn allows me to measure if and when a teacher might have observed unfair promotions in her own school in the past. Exposure to unfair promotions adversely affects non-applicant teachers’ output, lowering their value-added and raising the probability that high-value-added teachers quit. The value-added effect appears to be driven primarily by teachers’ social preferences for peer workers and the consequent erosion of their morale when peers suffer unfair treatment, while the quitting effect comes mainly from non-favored prospective applicants’ career concerns as they learn about the principal’s bias and leave due to poor promotion prospects. These adverse spillover incentive effects lead to a substantial reduction in school-wide output, which is only slightly mitigated by increased productivity among favored teachers. Finally, a transparency reform that required principals to disclose to their peers the profiles of teachers that apply for promotion reduced the principals’ bias and improved the overall productivity of schools.
This paper takes a step towards bridging the theory of internal labor market (ILM) and external labor market (ELM) by studying an integrative framework with job changes both inside and across firms. In particular, we consider a dynamic model, whereby firms use retention and promotion as the personnel policy to positively select the workforce (workers) concerning utility of working and abilities. The equilibrium captures three sets of empirical findings in a single setting. That is, (1) standard ILM findings (concerning the pay and promotion pattern inside firms); (2) standard ELM findings (concerning the pay and mobility pattern across firms); (3) standard, yet unexplained, findings on the “interaction” of ILM and ELM (concerning effects of promotion on exit rates and effects of entry routes on career paths and workforce compositions).
In the last two decades, the widespread use of web-based social networks has led to a higher visibility of workers to the labor market. We theoretically and experimentally analyze the consequences of such increased labor market transparency for the efficiency of job assignments, the wages of workers, and firm profits. Our theoretical results show that higher visibility of workers increases the efficiency of job assignments, leads to a redistribution of income between workers of different ability, and increases overall surplus. Our experimental findings generally support the theoretical results with the exception that increased visibility leads to higher worker turnover such that surplus does not increase.
We develop a model of competition for managerial talent in which firms asymmetrically learn about the ability of their managers. In equilibrium, firms poach talent from competitors, even in the absence of gains from trade. Our main result is that firms inefficiently chase lemons: some poached managers are less productive in their new jobs. Our model provides an equilibrium explanation for the apparent lack of portability of talent observed among some finance workers, such as security analysts and mutual fund managers. The model has predictions linking firm heterogeneity to managerial turnover, compensation, and the distribution of talent.
We study optimal team design. In our model, a principal assigns either heterogeneous agents to a team (a diverse team) or homogenous agents to a team (a specialized team) to perform repeated team production. We assume that specialized teams exhibit a productive substitutability (e.g., interchangeable efforts with decreasing returns to total effort), whereas diverse teams exhibit a productive complementarity (e.g., cross-functional teams). Diverse teams have an inherent advantage in fostering desirable implicit/relational incentives that team members can provide to each other (tacit cooperation). In contrast, specialization both complicates the provision of cooperative incentives by limiting the punishment agents can impose on each other for short expected career horizons and fosters undesirable implicit incentives (tacit collusion) for long expected horizons. As a result, expected compensation is first decreasing and then increasing in the discount factor for specialized teams, while expected compensation is always decreasing in the discount factor for diverse teams. We use our results to develop empirical implications about the association between team tenure and team composition, pay-for-performance sensitivity, and team culture.
Employees learn from the tasks they perform, and in the process they accumulate human capital that is potentially portable. If companies cannot commit to specific task assignments, they may have the incentive to assign workers to tasks that reduce the cost of retaining them but do not maximize their productivity. In contrast, equity partnerships assign tasks efficiently to their partners, because their remuneration increases with their talent and with the portability of their human capital. This provides a novel rationale for the widespread presence of partnerships in professional services and for the transition from equal sharing towards performance-based remuneration systems.
In a firm organized into business units, we show that profitability increases if procurement is delegated to the division in charge of production. We emphasize that our results are driven by the business unit having a different objective function than the headquarters (HQ). The profitability of procurement delegation is affected by how essential the production facilities are to the activities of the firm, and by strategic distortions in both transfer and input prices. We also examine the vertical separation of activities as an alternative to procurement delegation.
This paper investigates a rationale for the use of secret reserve prices in auctions. If bidders are better informed than the seller about a common component of auction heterogeneity, the seller can allocate more efficiently by keeping her reserve price secret and revising it after bids are submitted. We build a model of a first-price auction under unobserved auction heterogeneity (imperfectly observed by the seller) that captures this rationale and derive conditions for identification. The model is estimated using data on French timber auctions, where the government uses an ex-ante secret reserve price (which can be revised down if no bid is above it). Counterfactual analysis shows that acquiring perfect signals about unobserved auction heterogeneity would allow the seller to increase revenue by 8.41% and surplus by 6.73%. Learning from submitted bids improves allocative efficiency albeit with some revenue loss.
We study the effects of intensifying competition for contracts through advertising. Publicizing contract opportunities promotes bidder participation, potentially leading to cost efficiency gains. Yet extensive advertising could exacerbate adverse selection of bidders on non-contractible quality dimensions. We study this trade-off in the context of procurement contracts for the U.S. Department of Defense. Our empirical strategy leverages a regulation that mandates agencies to publicize contract opportunities that exceed a certain threshold. We find that advertised contracts increase competition and reduce prices. However, we find that the post-award performance of publicized contracts worsens, resulting in more cost overruns and delays. The latter effect is driven by goods and services that are relatively more complex, highlighting the role of contract incompleteness. We complement our results with a model in which the buyer endogenously decides the extent of competition. This model allows us to recover public buyers' preference parameters over price, quality, and idiosyncratic favoritism, and further study the extent to which the trade-off between competition and adverse selection can be delegated to the agent.
Bargaining breakdown—whether as delay, conflict, or missing trade—plagues bargaining in environments with incomplete information. Does communication alleviate these costs? Prior theoretical and experimental evidence is ambivalent. We examine this question using field data from an online bargaining marketplace: eBay Germany’s Best Offer platform. On May 23, 2016, the platform introduced unstructured communication allowing buyers and sellers on the desktop version of the site, but not the mobile app, to accompany price offers with a message. Using this natural experiment, our differences- in-differences approach documents a 14% decrease in the the rate of breakdown among compliers. Though adoption is immediate, the effect is not. We show, using text analysis, that the dynamics are consistent with repeat players learning how to use communication in bargaining.
This paper analyzes the link between wages and outside employment opportunities. To overcome the fact that factors that affect a worker’s outside options may also impact her productivity at her current job, we develop a strategy that isolates changes in a worker’s information about her outside options. This strategy relies on the fact that individuals often learn about jobs through social networks, including former coworkers. We implement this strategy using employer-employee data from Denmark that contain monthly information on wages and de- tailed measures of worker skills. We find that increases in labor demand at former coworkers’ current firms lead to job-to-job mobility and wage growth. Consistent with theory, larger changes are necessary to induce a job-to-job transition than to induce a wage gain. Specification tests leveraging alternative sources of variation suggest these responses are indeed due to information rather than unobserved demand shocks. Impacts on earnings are concentrated among workers in the top half of the skill distribution. Finally, we use our reduced-form estimates to identify a structural model that allows us to estimate bargaining parameters and investigate the relevance of wage posting and bargaining across different skill groups.
Reinforcement learning algorithms now outperform the best humans in a wide variety of Markov Decision processes (MDPs), such as chess and Go. We 1) formulate bargaining in "Best Offer" listings on eBay as an MDP; 2) train neural networks to behave like human buyers and sellers using a large, publicly available dataset of Best Offer listings; 3) train a reinforcement learner to play optimally against these agents as either the seller or a buyer; and 4) characterize the learner's behavior. More generally, we provide a template for estimating optimal policies in economic settings where experimentation is infeasible but data are plentiful.
Multi-product firms are increasingly engaged in the targeting of consumers using complex pricing models. Bundling is one such pricing strategy that theory suggests should increase firm profits. However, many of these models fail to account for how real consumers may struggle to fully optimize when faced with such complex price menus. We conduct a lab experiment to explore how consumers may fall short of optimal decision-making under increasingly complex pricing menus. We then randomly introduce additional cognitive load to explore how external stress may exacerbate the effects of complex pricing. Finally, we show how firms might account for these results in choosing a more streamlined pricing strategy.
Trade credit is one of the most important sources of short-term finance in buyer-seller transactions. This paper studies a seller's trade credit provision decision in a situation of repeated contracting with incomplete information over the buyer's ability and willingness of payment compliance when the enforceability of formal contracts is uncertain. We show that selecting the payment terms of a transaction corresponds to managing an inter-temporal trade-off between improving the quality of information acquisition and mitigating relationship breakdown risks. The dynamically optimal sequence of payment contracts can be uniquely determined provided that the quality of contract enforcement institutions is sufficiently low.
This paper studies the intermediation of auto loans through auto dealers using new and comprehensive data. Lenders give auto dealers discretion to price loans. The first part of our project leverages details of the contracts between lenders and dealers to demonstrate that many consumers are substantially less responsive to finance charges than to vehicle charges. This wedge in responsiveness is particularly pronounced for consumers with low income as well as consumers living in areas with low education levels. Dealers take this consumer-specific wedge into account when jointly pricing the car and the loan, leading to a form of price discrimination. We then estimate an equilibrium model that allows us to explore the implications of this wedge in an oligopolistic market. Counterfactual exercises demonstrate that the wedge in responsiveness has a substantial impact on dealer pricing behavior, consumer surplus, and the distribution of prices across areas with low and high income. Finally, we explore what happens if dealers have no discretion to price loans. Because of an effect reminiscent of double marginalization, we find that total prices would increase and consumer surplus would fall.
Behavioral economists have proposed that loss-averse employees increase productivity when bonuses are "loss framed"—prepaid then clawed back if targets are unmet. We theoretically document that loss framing raises incentives for costly risk mitigation and for inefficient multitasking, potentially leading to large negative performance effects. We empirically document evidence of these concerns in a nationwide field experiment among 294 car dealers. Dealers randomized into loss-framed (but financially identical) contracts sold 5% fewer vehicles than control dealers, generating a revenue loss of $45 million over 4 months. We discuss implications regarding the use of behavioral economics to motivate both employees and firms.
I study a formal model where competing interest groups privately acquire and disclose verifiable information to a principal over time. The focus is on how observing lobbying behavior of competitors---transparency---affects aggregate information provision. I find that transparency may be disadvantageous because groups are dissuaded from acquiring information if they learn that competitors have disclosed favorable information for their cause. Conversely, transparency allows interest groups to be selective in acquiring information and may lead to more informed decision-making. Further, transparency causes changes in the timing of disclosure because interest groups face a trade off between scaring competitors with early disclosure and waiting to learn whether further information acquisition is necessary. The results contribute to debates over lobbying transparency in organizations such as the European Commission.
How does learning about proposer power affect agents’ ability to compromise? We study a dynamic multi-issue bargaining game between a proposer and a responder. Issues arrive at random, and with each new issue, the proposer makes a proposal, which the responder either accepts or rejects. In case of rejection, the proposer can attempt to force the issue and implement his ideal and will succeed with some probability that is a function of the proposer’s unobserved ability. Both players learn about the proposer’s ability over time as new issues arise. We show that there is conflict when the belief about the proposer is either high or low, but that compromise can occur in an intermediate region of beliefs. This is driven by both players’ incentives to avoid learning in that region. We extend the model to include the possibility of difficult issues arising in which no compromise is possible. Dif- difficult issues can disrupt a previously established compromise, forcing conflict for issues in which compromise was previously possible (easy issues). The reason conflict ensues is that the responder learns the proposer is weak and no longer has an incentive to compromise, even on easy issues.
This paper examines what distinguishes legal order from other forms of social orders, under what circumstances legal order applies and what the legal order can achieve. We construct models of repeated interactions where, in every period, buyers and sellers are matched pairwise. The seller has an opportunity to cut cost, and this may or may not affect the value that a buyer derives from the transaction. We find that a legal equilibrium exists if and only if the cost cutting action to be deterred is sufficiently harmful. Such an equilibrium improves welfare than an individual order equilibrium if and only if the law embodies additional information about the ex ante efficiency of the cost-cutting action. A key feature is that it economizes on costly punishment by not letting victims decide about the imposition of sanctions.
The aim of this paper is to document whether and how buyers use discretion in public procurement. To do so we use detailed data on Italian procurement. Our evidence is that manipulation of procurement terms to avoid legal requirements of free competition mostly happens in central authorities (Ministries or national road authority), who are frequent buyers and run procurement with discretion more frequently. We implement a bunching estimator and we find that the manipulation of the terms of the contracts is associated to more discretion, less competition but with no extra procurement costs measured by rebates and ex-post renegotiations. This evidence is compatible with the idea that (large and repeated) buyers might rely on discretion to keep contractors accountable. Manipulation of the terms of the contract, in contrast, is less likely in local municipalities. Using detailed data on municipal procurement we find that municipalities are less frequent buyers and manipulate procurement less frequently running systematically more competitive procurement, which comes at no extra procurement costs. To establish causality, we run a regression discontinuity analysis and find that females mayors quasi-experimentally elected in closely contested electoral races do not manipulate procurement, use less discretion at no extra procurement costs. Our overall evidence suggests that while discretion in procurement reduces competition it can be beneficial in contexts with repeated interactions between buyers and sellers.
Informal inter-firm relationships are beneficial for participating firms but can be detrimental to market efficiency, e.g., in the case of informal collusion. By their nature, it is empirically challenging to identify collusive agreements sustained by informal relationships. This paper exploits a regulatory reform in the Colombia energy market to detect the presence of a collusive agreement among (some of) the electricity generating firms. To isolate informal collusion from confounders we exploit the lag between the announcement and the implementation of a transparency reform that would make it harder for firms to collude. Under informal collusion, the announcement of the reform destroys the future value of the informal agreement and thus leads to its instantaneous collapse – before the reform is implemented. Additional analysis identify the firms in the cartel and show that the announcement of the reform decreased by 43% the bid submitted by cartel members. A simple calibration of the incentive compatibility constraints suggests that the value of the collusive agreement was substantial for most of the participating firms.
This paper studies collusion via certified sharing of information in the context of mechanism design with transfers. The model of collusion builds on Aumann’s (1976) description of knowledge. A cartel can agree to collude on a contract if it is common knowledge within the cartel that the contract is incentive compatible and individually rational. Robustness of mechanisms to collusion via information sharing is defined as the impossibility of an agreement to collude. Robust mechanisms are characterized in a number of settings where a varying number of agents is liable to the cartel. Finally, I consider an application where a novel collusion-robust auction mechanism achieves the second-best revenue.
People are embedded in multiple social relations. These relationships are not isolated from each other. This paper provides a framework to analyze the multiplex of networks. We present a model in which each pair of agents may form more than one relationship. Each relationship is captured by an infinitely repeated prisoner’s dilemma with variable stakes of cooperation. We show that multiplexity, i.e. having more than one relationship on a link, boosters incentives as different relationships serve as social collateral for each other. We then endogenize the network formation and ask: when an agent has a new link to add, will she multiplex with a current neighbor or link with a stranger? We find the following: (1) There is a strong tendency to multiplex, and the “multiplexity trap” can occur. That is, agents may keep adding relationships with the current neighbor(s), even if it is more compatible to cooperate with a stranger. (2) Individuals tend to multiplex when the current network (a) has a low degree dispersion (i.e., all individuals have similar numbers of friends), or (b) is positively assortative. We also find that when relationships differ in their importance, agents tend to multiplex when the new relationship is less important and link with a stranger when it’s more important. Lastly, we find empirical evidence that supports our theoretical findings.
Firms can accrue large benefits by fostering worker initiative, but standardized work rules are still widely used. We present a model of relational incentives where the use of rules fluctuates as the firm faces shocks to its credibility. Worker initiative in adapting to local information can ensure production efficiency but requires strong incentives. As shocks weaken relational incentives, the firm may adopt rules that yield satisfactory (though suboptimal) performance. Rules help the relationship survive the shocks, but the relationship becomes less efficient in the future. While the relationship may recover, its ability to weather future shocks deteriorates, and, over time, it becomes more reliant on rules.
The defining products of our times are made up of modules, groups of components that are highly connected to each other but only loosely connected to those in other groups. We explore the implications of modular production for the emergence of modular organizations. To this end, we develop a team-theoretic model with costly communication. Production is described by a production network where each node represents a decision and a state, and the weight of the link between two nodes captures the need to coordinate the two decisions. Each node has an agent who observes the state, communicates with other agents in a designed communication network, and makes the decision. The optimal communication network trades off the cost of an additional link with the gain from better coordination. To explore modular production, we assume production has a community structure where each decision belongs to one community. The need for coordination is higher for decisions in the same community. We show the optimal organization will only be modular if the properties of the production function are moderate: there are few modules, none is large, and the need for coordination within modules is neither too high nor too low. We extend the model to allow for an overlapping community structure in which each decision belongs to two communities, and we generate testable predictions for the emergence of commonly observed organizational structures, such as M-form, U-form, and matrix organizations.
A firm that develops a new product potentially cannibalizes sales of existing products in the firm's product portfolio, where such cannibalization is more costly the more profitable are sales of the cannibalized products. Thus, if the firm is currently producing a product for which its market power is substantial, it will want to control the research and development process in order to limit cannibalization. In this paper, we explore how this basic logic affects the organization of investments in research and development. We first build and analyze a theoretical model of the research and development process in which conducting R&D in-house provides the firm more control over the new product's location in product space. We then explore the model's testable predictions using data from the pharmaceutical industry concerning patents, patent expiration, and decisions concerning whether various stages of the research and development process are conducted in-house or outsourced. Our empirical findings support the model's testable predictions.
Although the causes of conflict in networks and interorganizational relationships have long been investigated, scholars have overlooked the importance of stakeholders with multiple roles in eliciting managerial (mis)perceptions and potential for conflict. We find that franchisees take on multiple stakeholder roles, as customers, employees, investors, and business partners. Drawing from agency and stakeholder theories, we empirically demonstrate that the franchisor’s perception of franchisees’ multiple stakeholder roles affects managerial support and conflict outcomes in franchisor-franchisee relationships. The primary data support our claims that when franchisees are viewed as investors and business partners, franchisors increase the level of support offered and franchise systems experience less conflict.
Network scholars posit that networks provide reputational enforcement superior to market reputation (i.e. the reputation that would emerge from a sample of market participants). In this view, reputational signals are local to social network neighborhoods: they are stronger in the presence of shared 3rd parties and decay with network distance, as a result of two mechanisms: (1) it is costly to identify and communicate with socially distant others; (2) there is little reason to trust them. Consequentially, reputational sanctions and norm enforcement are also local to the network. The rise of reputational aggregation platforms (RAP) such as Amazon and eBay calls these mechanisms into question. This paper identifies an additional mechanism driving network-based reputational enforcement, that places a boundary condition on both network and market reputation-based reputational enforcement. It argues that the informativeness of a reputational signal from A to B about C is increasing in B’s belief that A used the same norms B would in making her evaluation of C. The closer A’s norms are to B’s, the more informative the signal. Though some exchanges rely on widely shared norms, many exchanges rely on locally shared understandings between exchange partners. While such norms can and do differ across actors, thereby diluting the informativeness of reputational signals, there are good reasons to believe that norms, and thus reputations and reputational enforcement are local to social network neighborhoods. The more local the norms, the more local the reputation and the less informative is market reputation (and thus, RAPs). The more universal the norms, the more informative is market reputation, and the greater the ability of RAPs to enforce norms.
Intellectual Property Rights (IPR) protect firms from imitation and are considered crucial to promoting innovation and technological diffusion. This paper examines the impact of IPR on import-sourcing decisions of multinational firms. We consider a framework in which firms offshore production of an intermediate good to another country. Firms can decide either to import the intermediate good from vertically integrated producers, or from independent suppliers. In both cases, offshoring part of the production process embodies a risk of imitation. The model predicts that, under reasonable parameter restrictions, stronger IPR disproportionately encourages the imports of intermediate goods through vertical integration. Using the US Related-Party Trade database, we find empirical evidence supportive of the positive link between level of IPR and the relative share of imports from vertically integrated manufacturers.
While focusing on residual rights, the property rights theory---i.e., PRT---of the firm overlooks the legal protection of each party's input. We assume, instead, that the legislator selects the upstream firms' property rights, which, in turn, determine their ex post bargaining power, by maximizing the supply of projects possibly adopting the efficient full-investment profile and, conditionally on this goal being reached, minimizing less likely deviations to inefficient intermediate-investment profiles. Differently from the PRT, each party's ex ante incentives are exclusively determined by property rights, which are, in turn, entirely driven by the---absolute and relative to innovation costs---size of the default payoffs. When the latter are small and the gains from trade are large, any market structure delivers the same incentives for full-investment, and the legislator's goal becomes discouraging costly deviations by unbalancing the most the parties' investment returns. To do so, she protects more the party with the smallest default payoff in such a way that the other one receives more often its preferred ownership structure. Opposite patterns arise when investment returns are already unbalanced by one disagreement payoff being large and, thus, fostering full-investment is pivotal. Regardless of the size of the innovation costs, each party's property rights are weaker (stronger) the larger is its (partner's) default payoff. These patterns remain true when one party dominates institutional design or has a stronger impact on the project value. In the last case, property rights do not generally favor the party shaping the most the relationship value. Crucially, our conclusions are consistent with the interplay among proxies for the legal protection of the downstream firms' personal and intellectual property, firms' presence in the value chain, process and capital specificity and R\&D intensity in a panel of 119 countries spanning the 2006-2018 period.
Firm integration is fundamentally shaped by contractual frictions. But do better contracting institutions, reducing these frictions, induce firms to be more or less deeply integrated? To address this question, this paper exploits unique micro data on ownership shares across half a million firm pairs worldwide, including domestic and cross-border ownership links. We uncover a new stylized fact: Firms choose higher ownership shares in subsidiaries located in countries with better contracting institutions. We develop a Property-Rights Theory of the multinational firm featuring partial ownership that rationalizes this pattern and guides our econometric analysis. The estimations demonstrate that better contracting institutions favor deeper integration, in particular in relationship-specific industries.
Physical coordination has been a challenge in electric power networks since their invention in the late 19th century. Coordinating the generation and delivery of supply and demand in a system that requires real-time balance is essential, and both technological and institutional innovations emerged as approaches to grapple with network coordination. In this paper we employ institutional and organizational economics to examine three organizational approaches to coordination that emerged in the early 20th century: interconnection, integration, and holding companies. Interconnection of separately-owned distribution systems using high-voltage transmission lines provided reliability benefits when the systems faced uncorrelated demands, but posed organizational and incentive problems due to the asset specificity of the relevant capital assets (Williamson 1983). Integration (both horizontal and vertical) through acquisition and merger addressed some of these problems, and led to considerable industry consolidation through the 1920s. A third approach was holding companies that took ownership stakes in operating companies as a way of using financial structure to create larger networks. A holding company enabled one firm to gain operational control of multiple utilities (Hausman & Neufeld 2004). We analyze spatial/regional differences in the uses of these organizational approaches. Specifically, we exploit the exogeneity of hydroelectric power (due to geography) to test whether holding companies were more prevalent in regions where physical coordination was more challenging and costly. Hydroelectric power plants are spatially immobile (and thus exogenous) and their capital has asset specificity and is non-redeployable. We test the hypothesis that states with lower population density have a higher demand for interconnection, and thus experience earlier adoption of the holding company structure than other states, using data from the Census of Electrical Industries 1902-1937.
We provide results from a detailed survey of automation and digitization in firms in the automotive sectors in the United States and Italy. In both countries, we find evidence of heterogeneity of organizational architectures—some firms organize around a “Taylorist” approach and others around a pragmatic approach. We find some notable differences in the adoption and use of new technologies, particularly robots. In the US, robots are considered an effective tool to address skill shortage, but not as much in Italy. This is partly explained by the fact that in the US finding workers who possess the desired skills is seen as a major challenge. Italian firms attribute to robots a higher impact on improving safety conditions in the shop floor. This might explain why Italian firms have adopted more technologies for parts tracking, given they are frequently used to trace all the production processes to guarantee product safety. Overall, firms in both countries appear more likely to adopt robots to increase quality rather than to reduce unit and labor costs. Despite technology adoption is underway (though more in the US), we found that companies in both countries (especially in US) are not automating data collection suggesting that firms are not utilizing the new automation and digitization technologies to their fullest extent but in the “old” way.
This paper contributes to recent scholarship regarding Long Term Agreements (LTAs) by providing empirical evidence that suppliers are more likely to undertake the costs of an LTA if the transaction requires significant capital expenditures or the potential for large sunk costs. Through a survey of a random group of 63 Ohio supplier/manufacturers, the paper explores why supplier/manufacturers with a full range of contractual and non-contractual solutions might choose one set of arrangements over others. It then seeks to link its findings to a broader theory of how parties bargain to solve durable problems under conditions of uncertainty, sunk costs and opportunism, while minimizing costs. Although only a small portion (17%) of our sample size indicated that they used LTAs in the majority of their transactions, this group indicated they were more likely to produce customizable goods and have significant capital expenditures. Such a finding is consistent with a model of bargaining in which parties in a transaction seek to achieve their overall goals of wealth maximization while minimizing costs under conditions that include bounded rationality, sunk costs and opportunism.
We examine the effect of technological change on the incentives to cooperate in the provision of common-pool resources (CPRs). We focus our analysis on CPRs that require investments in improvement and maintenance, such as irrigation systems. We find that major technological improvements, such as replacing a primitive irrigation system with a modern system, risk compromising cooperation as the temptation to freeride on other farmers’ investments is increased. By contrast, minor technological improvements within an existing irrigation system, such as strengthening water diversion devices, do not hinder incentives to cooperate. In our analysis, an irrigation system can be well-managed for a long period of time during technological progress when changes are minor. When technology changes are major, cooperation can be maintained if the community is patient and initially their discount factor is well above the critical level for cooperation. However, when the threshold is reached, any further major technological improvement will lead to a breakdown of cooperation and collapse of investments in the irrigation system.
How can societies learn to enforce and comply with social norms? Here we investigate the learning dynamics and emergence of compliance and enforcement of social norms in a foraging game, implemented in a multi-agent reinforcement learning setting. In this spatiotemporally extended game, individuals are incentivized to implement complex berry-foraging policies and punish transgressions against social taboos covering specific berry types. We show that agents benefit when eating poisonous berries is taboo, meaning the behavior is punished by other agents, as this helps overcome a credit-assignment problem in discovering delayed health effects. Critically, however, we also show that introducing an additional taboo, which results in punishment for eating a harmless berry, improves the rate and stability with which agents learn to punish taboo violations and comply with taboos. Counterintuitively, our results show that an arbitrary taboo (a "silly rule") can enhance social learning dynamics and achieve better outcomes in the middle stages of learning. We discuss the results in the context of studying normativity as a group-level emergent phenomenon.
Why are most mass political action, when they occur, of very short duration? Why does the onset of revolution and mass protests, seem often so unpredictable? We provide unified answers to these questions by building a model based on the concept of revolutionary capital, a state variable that evolves stochastically and endogenously over time, and the stock of which is the basis for a revolutionary leader's decision to engage intertemporally in mass action. The key feature of the equilibrium dynamics is the hazard rate of the status quo to the scale of action. The predictions of the model are consistent with preliminary empirics of reported anti-government protests across 162 countries over 1990--2018.
We study the repeated prisonerís dilemma with random matching when some players may be "bad types" who never cooperate. We establish an anti-folk theorem: with anonymous players, cooperation is impossible in large groups under a smoothness assumption on the distribution of the number of bad types. Communities may avoid this grim outcome by segregating themselves into smaller sub-groups, at the cost of forgoing some gains from trade. Making players' identities observable does not help much: cooperation remains impossible in groups whose size N is large relative to the discount factor delta, in that (1-delta)*(sqrt of N) going to infinity. However, allowing within-match cheap talk supports cooperation in much larger groups: those where (1-delta)*(log of N) going to 0. Thus, in contrast to the situation where all players are rational, communication is essential for supporting cooperation in large groups in the presence of a few bad apples
Permissionless (or public) blockchain networks provide a new form of decentralized private governance in the digital sphere. The unique nature of permissionless blockchain networks – especially that anyone can participate in them - means the polycentric balance of governance forces to which they are subject merits more granular analysis. We provide a comprehensive typology of the predominant forms of cryptocurrency blockchain governance and discuss their implications for the ongoing development of these novel organizational forms. In our typology, blockchain is governed by blockchain protocol, along with a set of subsidiary, competitive, and superior governance forces. Governance by code includes aspects of the constitution of blockchain. Governance forces subsidiary to the blockchain protocol include distinctions between discrete constituent groups like miners and users, and how protocol choices themselves lead to specific concentrations of power in practice. Moreover, cryptocurrency users have choice in terms of their digital tokens of value, as well as currencies and other liquid stores of value writ large, which means competitive forces also shape governance choices on a given cryptocurrency blockchain. Finally, blockchain is a polycentric enterprise: cryptocurrency users, participants, and exchanges are subject to a variety of governance forces that are superior to a given cryptocurrency network itself; any given individual playing one of those roles is subject to a variety of legal restrictions surrounding property, contract, tax and securities law in whatever jurisdiction they reside, at a minimum. In sum, permissionless blockchains are themselves a discrete form of governance but will nonetheless inevitably be subject to other processes of governance, both subsidiary and superior to the organization whose information is contained on the distributed ledger controlled by a given blockchain protocol.
An extensive body of research investigates the conditions giving rise to informal agreements and formal contracts between two partnering organizations. A largely separate body of work has addressed the emergence of ties within organizational networks. In this paper, we contribute to the integration of insights from network theory and contract theory. Specifically, we explore how the level of formality in an agreement between two parties depends on the broader network of exchange relationships in which they are embedded. The analysis draws on the network literature to develop a theory of governance choice that emphasizes the network neighborhood. We argue that partners’ outside ties influence the coordination, control, and information exchange within the partnership. We test the validity of our claims by analyzing collaborative agreements among U.S. Fire Departments between 1999 and 2010. The results indicate that the network neighborhood significantly influences the way that partners work together.
Over the last decade blockchain has attracted a lot of attention due to its potential applications in the economy. The technology behind blockchain promotes fully decentralized systems where individuals can interact in an atomic, secure, and anonymous fashion to the point that market exchanges become “trustless”. This is in contradiction to the traditional view of transacting, characterized by the need of centralized authorities that regulate, oversee and help to establish trust among parties which reduces frictions related to value exchange. The dichotomy between the virtues of decentralized blockchains against the problems of centralized governance has monopolized the discussion around the economics of blockchain, driven by disintermediation, efficiency and privacy. Drawing from the work of Elinor Ostrom, we argue that this is a fundamentally false dichotomy. As Ostrom reminds us, governance is very much a social problem that goes beyond the rhetoric of decentralized market efficiency against centralized state authority. The work of Ostrom and her colleagues draws attention to the fundamentally social processes of rule setting in the governance of complex economic systems. All blockchains require governing consensus rules that define their operation, but the question about the rule setting process within blockchain ecosystems has largely been neglected in the literature. To illustrate our argument, we will analyse the rule setting process in two crypto based environments: public (Bitcoin) and community-based (Ethereum). This paper represents a first theoretical attempt to investigate how we can use Ostrom’s fundamental arguments about markets, states, and polycentric governance to understand the social processes of governance in blockchain.
In response to a need for enhanced water governance, water institution reforms are taking place around the world. Common among these reforms is a shift from monocentric to polycentric governance systems, bridging multiple scales of stakeholders through a mix of institutional arrangements. However, even though water reforms identify probable benefits from a polycentric approach, the ability to predict which type of institutional arrangement is likely to yield desired outcomes remains a challenge. This paper applies the institutional resource regime framework and transaction cost economics to evaluate the current water regime in British Columbia and identify if an alternative water governance arrangement can support sustainable outcomes through minimized transaction costs. First, I perform an assessment of the water regime in British Columbia from 1859 to 2016 to identify if the regime typology is headed towards integration and associated sustainable outcomes. Second, I compare the perception of transaction costs associated with a watershed and a regional district alternative arrangement to the current system. Data were collected through 36 surveys and 5 semi-structured interviews with government officials and document analysis. Results confirm a complex water regime in British Columbia and an increase in transaction costs under both watershed and regional district alternative arrangements. Despite an increasing focus on regional districts as an appropriate alternative arrangement to improve coherence, I observe fewer transaction costs associated a watershed arrangement. Nevertheless, the current system, although complex, is perceived more efficient compared to either alternative arrangement.
Urban planning reform proposals have generally failed to provide bottom-up rules that, given local geography and politics, can overcome political opposition to change and allow Coasean bargaining while sufficiently capturing externalities. I suggest four strategies to fill that gap in the literature. Recent research on the commons has rarely addressed deficiencies in regulation of new urban construction, and yet multiple studies estimate that such deficiencies cause large impairments of productivity and welfare. Many places face transitional gains traps where homeowners and others block any move to a more efficient system. I argue that allowing bottom-up approval of better uses of land may reverse the current Olsonian problems by allowing the formation of groups with strong incentives and the means to lobby for such changes. It can be seen as a tactic from Riker’s heresthetic: splitting the blocking homeowner-voter majority by allowing former objectors to defect from the regulatory cartel and benefit from more intensive land use. One example is the recent law in New Zealand, allowing a landowner to waive the protective setback rule binding a specific adjoining property. In England, a recent change now permits a parish to approve development on its own green belt, albeit subject to tight constraints. Ellickson’s suggestion of allowing a vote by individuals on a single stretch of street (‘face block’) to upzone that stretch is a third approach that has not yet been tried in practice. Analogously, a fourth rule could allow upzoning by vote of the residents of a city block, subject to restrictions on altering external façades of the block and to angled maximum height planes to preserve light to other blocks.
There is a growing consensus among regulators, civil society, and even CEOs that corporations must consider the impact of their activities on a broad range of actors – not just shareholders. The need to do so is apparent from the externalities that corporations routinely impose on non-shareholders. Lack of legal accountability subsequently translates into low legal risk for corporate misconduct, which reduces the likelihood of prevention and results in three separate injuries to third parties: first, the initial corporate misconduct; second, denial of justice in the courts; and, third, the prospect of recurrence because of inadequate prevention. While contracting parties often rely on multiple third parties – not signatories to the contract – to play important roles in facilitating exchange, we deny this community protection from the externalities that contracting parties impose on them under a traditional view of contract as an exchange between two parties. This Article examines a corporation’s duties to others in its role as a contracting party. Contracts are the primary means through which corporations interact in the world; revising our views about the duties that contracting parties owe third parties has significant implications for our views of how corporations should treat non-shareholders. Normatively, this Article proposes an alternative view of contracts as an ecosystem with the following duty to contract in order to translate theory into practice: Contracting parties are required to take into account negative externalities to third parties when the contracting parties could reasonably foresee that performance of the contract would create a risk of physical harm to these third parties.
We compare renegotiation rates of procurement contracts in which the procurer is either a public administration or a private corporation. We find that public-to-private contracts are renegotiated more often than private-to-private contracts and that this pattern is more salient in politically contestable jurisdictions. The frequent renegotiation of public contracts results from their inherent rigidity and provides a relational quality of adaptability to contingencies in politically contestable environments.
While judicial independence is often considered to be a foundation for the rule of law and economic prosperity, there is overwhelming evidence suggesting that judges and court decision-making are sensitive to the political environment. In this paper, we explore one channel through which political alignment of the judges can manifest itself and verify whether political party support, expressed as a recommendation to the tribunal, is relevant for the allocation of judges to adjudication panels. Our specific example comes from the Polish Constitutional Tribunal and refers to the period 2005- 2014. With respect to the mass of filed cases, we do not find that allocation of judges to adjudication panels favored nominees of any political party. Our results however provide support for the strategic selection to adjudication panels in politically sensitive cases in the period 2011-2014. We find that nominees of the governing party were allocated to these panels more often than other members of the tribunal and that in these cases they had more voting power than in cases of lower political clout.
We investigate the effect of public opinion on the European Union centralised compliance monitoring system. We argue that because the authority and effectiveness of its enforcement actions are affected by public support, the European Commission has incentives to adjust its enforcement decisions to the public mood. Whereas high public support gives the Commission greater leverage to discipline Member States, low support acts a constraint on harsher forms of enforcement action. To address the endogenous character of enforcement and public support, we use unemployment rate and health care cuts interacted with Eurozone bailouts as instrumental variables to estimate the effect of public support on enforcement actions. Consistent with our theoretical predictions, we find the strongest evidence for the influence of public support on enforcement at the litigation stage when the Commission decides whether to take member states to court.
This paper provides an empirical analysis of manipulations of seized drug amounts by police officers, based on a unique dataset that contains full information on drug crimes in Russia reported during 2013-2014. First, using a bunching estimator, I document a significant excess mass of heroin cases above the punishment cliff. The mass is 6.325 times greater than the average number of cases in a counterfactual scenario without manipulation. Next, I employ an event study approach to investigate the incentives for police officers to manipulate and find that the motivation arises from the officers' performance evaluation system. One of the main indicators applied for evaluation is the number of serious and most serious drug crimes, which can be easily increased by moving offenders from below to above the threshold. Exploring the dynamics of this indicator during a calendar year, I document that it increases by 23% in the month when a police station is close to reaching the previous year's level of performance, current target. Comparing the performance evaluation systems of two separate drug control agencies, I find further evidence of this response to performance requirements. Finally, applying a novel bunching technique, I determine that police officers are more likely to manipulate the drug amounts seized from repeat offenders. The overall effect of manipulation on the sentence length of drug users is an additional year of incarceration, which is a 67% increase, compared to the average sentence length without manipulation.
Monitoring by external auditors is a ubiquitous practice in complex organizations. Frequently, the audited entity appoints the external auditor. While locally-appointed auditors might have better local knowledge, leaving discretion in the hands of the audited party might impair monitoring quality. In this paper, I exploit a unique setting which allows me to evaluate this trade-off in the context of auditing of municipal budgets of local governments. In 2011, Italy introduced a reform that removed the discretion of the appointment of municipal auditors from mayors and introduced a random-assignment system. The objective of the reform was to strengthen monitoring and ensure fiscal sustainability of municipal budgets. I study the consequences of increased monitoring on public finance outcomes of local governments. My identification exploits the staggered introduction of the reform across municipalities in an event-study setting. I obtain three main findings. First, the reform greatly increased compliance with fiscal rules: treated municipalities increase their surpluses by 20% and their debt repayments by 2%. Second, improvements largely come from municipalities in which the mayor was term-limited and from those local governments that were running deficits before the reform. Third, the improvement in compliance with fiscal rules comes at a cost: treated municipalities significantly cut investment expenditures by over 7% and increase local taxes by 8%.
We investigate a theoretical model that studies under which conditions reserve price underpricing represents a collusive equilibrium between pairs of buyer-supplier. We then provide empirical evidence of the adoption of this collusive strategy on the Russian public procurement for gasoline.
We study the impact of fiscal revenue shocks on local fiscal behavior. We focus on a very volatile revenue source (immovable property gains tax) in the canton of Zurich, Switzerland, and analyze fiscal behavior following large and rare positive and negative revenue shocks. We apply causal machine learning strategies and implement the post-double-selection LASSO estimator to identify the causal effect of revenue shocks on public finances. We show that local policymakers are, on average, fiscally conservative: they smooth positive shocks and mitigate negative ones by spending cuts. Fiscal behavior is partly driven by the organization of the municipal legislative organ and the electoral cycle. The fiscal responses in towns with local assemblies as well as in pre-election years are best described as fiscally conservative. In contrast, the responses in towns with local parliaments and in post-election years are sensitive to revenue fluctuations, i.e., they spend positive and mitigate negative shocks.
Capitalist systems regularly produce innovations in the form of novel technologies and business models that put interested financial investors in a situation of fundamental uncertainty. Absent a factual basis for assigning probabilities to possible outcomes, investors often turn to subjective prior beliefs about an innovations' chances of success or failure. In this paper, we present a theoretical model of how investors adopt subjective priors under fundamental uncertainty. The model's core element is a "narrative contest", a competition in which profit-seeking financial intermediaries wish to influence investors' priors about the chance that a recent innovation will indeed deliver a high rate of return. Using this framework, we identify factors that make investors more likely to adopt "exuberant" priors, i.e., priors that lead them to ignore objective warning signs for too long. We also demonstrate how our model can guide a financial regulator that, realistically, does not have better information than the investors.
Using a national law and close municipal elections in Peru, I implement a nonparametric regression discontinuity framework estimating the impact of political organization on municipal investments upon the advent of regulation integrating municipalities into a national public investment system. Nationwide party mayors elected in close contests increase municipal investment by 60% compared with local party mayors; they also seek more external contracting investment deals with more diverse outside partners and obtain more beneficial social outcomes for their communities. Evidence on organizational structure and capabilities as channels for the influence of nationwide party victories is discussed.
We examine the impact of immigrant legalization on the distribution of state and local spending by exploiting variation in legal status arising from the 1986 Immigration Reform and Control Act (IRCA), which legalized three million Hispanic migrants. We find that governors, irrespective of party, allocate more per capita to IRCA-affected counties. This allocation is sensitive to the governor’s electoral incentives and leads to Hispanic educational improvements, suggesting that it is politically motivated and targeted. Overall, our work underscores the importance of public expenditure as a channel linking legal status to a range of socio-economic benefits documented by the literature.
We take a heterogeneous difference-in-differences approach to estimate the effect of an environmental regulation on jobs and firm performance in China. We study both directly regulated "dirty" firms and indirectly regulated "clean" firms, which allows us to estimate net effects and address spillovers to clean firms in regulated regions. The regulation increases jobs by 5% for dirty firms and 8% for clean firms. Total factor productivity (TFP) increases by 4.4% and 10% for dirty and clean firms, respectively. We provide evidence that the most plausible explanation is adoption of pollution-reducing technology—a form of induced innovation. Differential effects for state-owned enterprises (SOEs) relative to private- and foreign-owned firms are consistent with weak enforcement for SOEs only. We also explore the distributional consequences of the regulation and find that the effects on TFP are positive for firms in wealthier and more-populated regions as opposed to poor and less-populated regions, but the positive effects on jobs are similar despite regional wealth and population.
State wildlife departments are among the oldest conservation agencies in the United States. They formed during the late 19th and early 20th centuries in the wake of severe depletion of many native wildlife stocks and some cases of extinction. As stocks of species such as deer, elk, turkey, antelope, and waterfowl rebounded dramatically during the 20th century, the organization and funding of agencies also evolved. This paper examines the causes and consequences of these changes. In the late 19th century state intervention evolved from season closures and other limitations on access to a system of licenses managed by state agencies. This system was significantly modified in the mid-20th century when federal legislation directed federal excises taxes on hunting and fishing equipment to wildlife agencies for specific purposes on the condition that those agencies did not direct state license funds to non-wildlife avenues. These federal programs remain in place today and are the bulwark of funding for state wildlife agencies along with hunting and fishing license revenues. The paper provides an overview of the history of wildlife agency funding and organization and develops an economic framework for analyzing agency budgets and behavior before and after Pittman Robertson. The paper uses panel data on state agency budgets and allocations decisions from 1925 to 2018 to test the implications derived from the economic models.
Despite the wide adoption, there is little evidence on the consequences of fiscal rules for the quality of government. I use data from Italian municipalities to study how fiscal rules affect the selection of politicians. In 1999, the Italian government applied fiscal rules to all municipalities. In 2001, it removed them for municipalities with less than 5000 inhabitants. Using a Difference-in-Discontinuity design, which enables control for an institutionally mandated increase in the wage paid to politicians at the 5000 threshold, I show that fiscal rules negatively affect the level of education of politicians. The result highlights a trade-off to fiscal rules. Reducing policymaking discretion may alleviate inter-jurisdictional externalities, but it may also lower the quality of the political class.
This paper investigates if research findings change political leaders’ beliefs and cause policy change. Collaborating with the National Confederation of Municipalities in Brazil, we work with 2,150 municipalities and the mayors who control their policies. We use experiments to measure mayors’ demand for research information and their response to learning research findings. In one experiment, we find that mayors and other municipal officials are willing to pay to learn the results of impact evaluations, and update their beliefs when informed of the findings. They value larger-sample studies more, while not distinguishing on average between studies conducted in rich and poor countries. In a second experiment, we find that informing mayors about research on a simple and effective policy (reminder letters for taxpayers) increases the probability that their municipality implements the policy by 10 percentage points. In sum, we provide direct evidence that providing research information to political leaders can lead to policy change. Information frictions may thus help explain failures to adopt effective policies.
We study how political turnover in mayoral elections in Brazil affects public service provision by local governments. Exploiting a regression discontinuity design for close elections, we find that municipalities with a new party in office subsequently appoint new personnel to the municipal bureaucracy across the board: across multiple service sectors, and at both managerial and non-managerial levels. In education, the sharp increase in the replacement rate of personnel in schools controlled by the municipal government is also accompanied by test scores that are .05-.08 standard deviations lower. In contrast, turnover of the mayor's party does not impact local (non-municipal) schools. These findings suggest that political turnover can adversely affect the quality of public services when the bureaucracy is not shielded from the political process.
Two groups with conflicting interests independently choose their investment. In case of peace, common political institutions distribute the resulting output as a function of these investments. However, each group may unilaterally trigger a conflict, whose outcome also depends on the players' investments. We assume full information and full commitment. Despite this, political institutions capable of maintaining peace may not exist. Furthermore, to maintain peace, political institutions may distort the players' investments away from their first best level. Therefore, we provide a novel explanation to why rational players may engage in an inefficient conflict, and to why inefficient political institutions exist.
Representing social institutions in terms of the well-known DeGroot model of information transmission and social learning, the paper shows the ability of institutions to facilitate or prevent social consensus. It is also shown that the disconnectedness of institutions from the social network has a profound impact on the time required to achieve consensus.
We document the importance of leadership on employee effort in the public sector in Denmark. Using hospitalization of leaders, we show the causal impact of leaders on employee effort measured through employee absenteeism in the entire public sector and in the three main sub sectors of health, education and public administration. We identify four aspects of leadership (personal traits; shocks and use of prescription medicine; incentives structures; and, unit organization) and document the correlation with employee absenteeism. We then decompose absenteeism into selection (employee) effects and incentives (unit) effects and we find that the incentives effects explains between 50 pct and 60 pct of the variation in effort. We show important variation in the correlation between the four leadership characteristics and incentives and selection effect across the three main sub sectors. Our result are consistent with the notion that leaders personal characteristics and their actions are crucial in promoting employee effort in the public sector.
The market competition literature verifies that firms provide stronger incentives to their managers to reduce costs in markets with more intense competition, even though profits become more volatile (Raith, 2003). Furthermore, when goods are substitutes, Cournot competition induces higher profits than Bertrand competition, but the type of competition becomes less important, the less related the goods are (Singh and Vives, 1984). In a laboratory experiment we find that gift-exchange emerges independently of the type and intensity of market competition. Whilst the competitive environment is a key factor for wage decisions and outcomes of principals, it has no direct impact on effort decisions of agents, which are mainly driven by wages. Beside that, individual characteristics (e.g. trust, loss aversion and reciprocity) are further key factors, which are influencing decisions and behavior in this gift-exchange setting.
We compare the quality of primary care provided by physicians employed as civil servants with physicians hired on fixed-term contracts in China, where facilities employ physicians through both mechanisms. Using data from interactions with mystery patients, we find that physicians employed on fixed-term contracts substantially outperform civil service physicians despite having worse qualifications. This difference remains large after controlling for measures of physician disease-specific competence, intrinsic motivation, and other physician and clinic characteristics. Despite the potential for stronger incentives to generate clinic revenue, we also find no evidence that fixed-term physicians increase unnecessary treatments relative to civil service physicians.
Little is known about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which final good producers choose which suppliers to integrate and whether to delegate decisions to integrated suppliers, when there is uncertainty in the production process. In this setting, integration has an option value: ownership rights give firm owners authority to delegate or centralize production decisions, depending on who can best solve the realized problems. To assess the evidence, we construct measures of vertical integration and delegation for thousands of firms in many countries and industries. Consistent with the model, we find that firms are more likely to delegate to suppliers of more valuable inputs and are more likely to integrate suppliers that produce more valuable inputs. Moreover, input risk increases the probability that a firm integrates a supplier, but has no impact on delegation choices
Adverse Selection in Agenda-Setting studies the costs and benefits of flexibility in designing government policies. It argues that adverse selection is a key problem in these settings: an individual who proposes a reform typically knows more about its effects than the ones who must approve or reject that reform. Increasing the proposer’s freedom to design the reform can exacerbate this adverse selection problem. If the proposer has a lot of freedom, then gridlock can result: the reform is always rejected in equilibrium. The paper argues that certain types of oversight can mitigate this adverse selection problem, lead the proposer to moderate her proposed reform, and break the resulting gridlock.
This paper studies wealth accumulation in communities. We develop a model of favor exchange among households in a community and their investment decisions. Our result identifies a key obstacle to wealth accumulation: wealth crowds out favor exchange. Thus, households under-invest, since growing their wealth would entail losing the support of the community. The result is a persistent wealth gap between such communities and the rest of the economy. Using numerical simulations, we show that increased productivity outside the community exacerbates under-investment inside the community, while strengthening kinship, friendship, or religious ties within the community encourages wealth accumulation.
We document that the share of corporate executives in federal elected office increased from 13.3% in 1980 to 22.6% in 2018 and find evidence suggesting that executives enter politics to advance their firms’ interests. First, firms make substantial political contributions to their former executives. Second, executives’ electoral wins and legislation passage are associated with positive stock returns for their firms. Third, executives are more likely to join congressional committees overseeing their firms’ industries. Fourth, executives accumulate a pro-business voting record. Finally, executives are more likely to seek political office when their industries are hit by competitive shocks.
Does more political power always lead to more favoritism? The literature's usual affirmative answer overlooks the role of scrutiny in shaping the pattern of favoritism over the ladder of power. When a higher-powered position comes with much tighter scrutiny, a politician reaching this position may reduce his quid-pro-quo favors towards connected firms for fear of jeopardizing his career prospect. We find robust RDD-based evidence of this adverse effect among candidates in close elections to the U.S. Congress and firms whose directors are their former classmates. A politician's election to Congress, compared with a defeat, reduces the stock value of his friend's firm by 2.8% within a week. Consistent with our theoretical predictions, this adverse effect varies in response to cross-state scrutiny levels, politicians' power to give favor, and connection strength. It is prevalent in politicians' earlier career, when career concerns are more important, and changes to a value gain in the later stage of their career.
Do U.S. corporate elites contribute to political campaigns purely motivated by ideological considerations, or are their donations also a tool of political influence? Using a new panel of contributions to Members of Congress (MCs) by 263,668 corporate leaders of U.S. corporations, I show that individuals’ donations vary over time as a function of MCs’ policy relevance for individuals’ companies: the likelihood of donating sharply increases when a MC becomes “policy relevant” to an individual’s company. The estimates suggest that 16 percent of the observed gap in U.S. corporate elites’ donations to “policy relevant” versus other MCs is driven by an influence-seeking motive.
This paper offers a novel theoretical explanation for the emergence of medieval assemblies. A king and two towns interact repeatedly. Each period, a public good project of uncertain quality requires funding. Each town privately observes a binary signal about the public good’s quality. King and towns all agree that the public good should be funded (resp. not funded) when both towns’ signals are positive (resp. negative). When signals are conflicting, the king wishes the project to be funded but the towns do not. The king can coercively extract contributions from the towns, unless it grants them autonomy, in which case contributions to the public good are voluntary. We first show that information aggregation cannot occur unless towns are granted autonomy. In an assembly, autonomous towns exchange information prior to choosing their contributions and play trigger strategies in which the public good receives funding whenever both towns are in favor. Alternatively, the king can approach towns sequentially, asking them to make publicly-observable contributions in the hope of triggering a cascade. Although he receives funding more often under sequential contributions than under an assembly, the king cannot rely on trigger strategies to discipline the first agent to be approached. As a result, sequential contributions are less likely to be feasible. This model sheds light on the evolution of national institutions triggered by towns’ administrative autonomy in 13th century England. In less than a century, English kings went from negotiating with towns sequentially to instead seeking their consent in representative assemblies. This modified the type of wars which received financing.
Recent works have argued that ancient Mediterranean economies were able to grow intensively. A common explanation is a process of Smithian growth spurred by reductions in transaction costs and increased trade flows. This paper contends that an ancient Greek institution, proxenia or proxeny, was among the innovations that allowed such process in the period 500-1 BCE. Proxeny entailed a Greek city-state declaring an individual from another city to be a ‘public friend’, a status that came with both functions to perform and privileges to enjoy. The paper presents the institution, shows how it could reduce transaction costs between communities and models its mechanisms. Then, proxeny is studied systematically via text and network analyses on data coded from the full body of digitized Greek inscriptions. The analysis shows that: (i) at least half of all attested proxeny relations were likely to be economically motivated; (ii) proxeny captures the vast majority of all privileged economic relationships; (iii) the distribution of influence within the proxeny network maps the concentration of trade and economic interests.
In this project we investigate the influence of institutions on industrial and firm growth by exploiting the unique historical context in Shanghai, China, during the late 19th and early 20th century. While there is a general consensus in the current literature that institutions are important for economic growth, the empirical assessment of this question has traditionally relied on comparing countries with different institutions to each other and over time. We aim to contribute to our understanding on institutions and economic growth by looking at the growth of firms that are subject to different institutions, but are located within the same city, and therefore share the same geographic amenities. Historical Shanghai provides an intriguing context for studying our research question. First, there is variation in the legal framework in which different firm operate, because a number of foreign nations were granted extraterritorial power, which meant that firms of these nations were tried by consular courts following laws of their own nations, instead of Chinese law. Due to (arguably exogenous) geopolitical reasons, certain countries were added/deleted from the list of nations that enjoyed extraterritorial status. Second, there is variation in local governance and regulation, as the city was divided into geographical segments that shared similar natural advantages but were ruled by distinctively different institutions including most prominently the International Settlement and the French Concession. We compiled a newly digitized dataset on firms in Shanghai between 1872 to 1941, covering firm level characteristics such as their specific location, industry and nationality, as well as outcomes related to key employment, employee nationality, trade, and firm organization. This provides us with a unique context to estimate the economic influence of different legal institutions and local governance on firm growth.
Institutional change is an important driver of long-run development. Broader representation in government is widely believed to be the central mechanism for this relationship. Using data on two centuries of political representation in England, we ask whether institutional change leads to more representative government over the long-run. We link individual-level data on all English Members of Parliament (MPs) and senior-level bureaucrats with genealogical datasets to document how changes in executive constraints and franchise extensions affected the inclusiveness of the state through selection into office. Despite enormous institutional change in the course of the Glorious Revolution and the Great Reform Acts, aristocrats and elite members of society saw stable representation in parliament and government throughout the period. While the selection effects are muted, there is suggestive evidence for a change in their incentives. These findings point towards state capacity as a main mechanism mediating the effect of institutional change on growth.
We study a model in which an agent may sell essential inputs to a private or a state firm. We show that the two firms rely on different “social contracts” with the government to sustain production. In the state firm the government must promise not to expropriate the seller and to pay for his inputs. For the private firm to be sustainable, the government must promise not to expropriate the seller and the firm’s owner, and to enforce their contracts. We show that it is harder (easier) for the government to credibly make the promises needed to sustain the private firm, relative to those needed to sustain the state firm, when political constraints on expropriation and contract enforcement institutions are weak (strong). Our model explains why privatizations in developing and transition countries with stronger pre-existing institutions have succeeded, while those in countries with weaker institutions have failed. More broadly, our model provides a theoretical framework to understand the relationship between institutions and the organization of production.
Many economic studies quantify the effects of infrastructures on income and welfare in the past, with the aim of informing policy makers today. A different group of historical studies examines how infrastructures came about, how they were owned and regulated, and how they performed. While diverse in their message, the fundamental role of institutions is a common theme. This paper explores how democratic institutions affected the railway sector in more than 20 countries between 1870 and 1912. The results suggest that formalization of democracy (de jure institutions) tended to encourage network expansion, increased company participation, lowered construction costs, and increased rates of return. Greater democratic participation (de facto institutions) generally had the opposite effect and led to lower average passenger fares with higher freight rates. More generally the analysis suggests a focus on institutions and its role in the infrastructure sector offers a different perspective and lessons for current development.
A fundamental constraint of information design is that propaganda must be believed to be effective. The presence of outside information tightens this constraint. We extend the canonical model of Bayesian persuasion to endogenize the presence of such information. The sender (government) chooses both the precision of an outside signal—it chooses a level of censorship—and a probability distribution over propaganda messages, where the distribution can be conditioned on the outside signal. The government bears an opportunity cost of censorship, in that the government relies on outside information to decide whether to repress rather than persuade. In equilibrium, the government employs both censorship and propaganda, but only if the citizen is ex ante close to indifferent between taking and not taking the action desired by the government. In this region of the parameter space, censorship and propaganda are perfect substitutes.
Can China’s authoritarian government “command” its way to an innovation-driven economy—that is, by mobilizing the entire bureaucracy and society to embrace innovation? We examine this question by focusing on the issuance of patents, a common indicator of innovation, in China from 1990-2015. Since 2006, when Beijing launched a national campaign to promote domestic innovation, the production of patents has exploded. But we find a significant regional variation that is not simply explained by levels of economic wealth—the political incentives of local leaders also influence patents production. Specifically, we find that cities, where local leaders face strong peer pressure to compete on the growth of GDP and fiscal revenue, produce the largest amount of patents, yet this does not affect the quality of patents in their portfolio. In other words, we identify two clear limits to Beijing’s ability to command its way to innovation through political campaigns and targets. First, the national drive for domestic innovation spurs larger quantities of patents, but not necessarily of higher-quality, as local leaders are assessed by numerical targets that measure quantity rather than quality. Second, even when the national leadership strongly prioritizes innovation, the production of patents is still conditional both upon local political incentives and local economic resources.
Social order is compromised when mafias fight violently to resolve disputes. Ironically, a corrupt local politician – instead of an honest one – may serve as an impartial arbitrator (“Godfather”) to safeguard local peace. This paper builds a model of politician-mafia interaction to show, both theoretically and empirically, that a rent-seeking local politician, with the power of the state, may provide credible commitment to enforce peaceful mafia negotiations. However, when such godfather politicians are eradicated, the local power vacuum leads to surges of local violence. The anti-corruption campaign in China since 2012 – an institutional shock to eradicate corrupt politicians – provides a unique natural experiment to corroborate our theory. A difference-in-differences test suggests that violence surged by 30% in regions with local officials eradicated due to collusion with mafias, compared to the regions without. We also conduct a series of robustness checks and placebo tests to confirm the link between the violence surge and the removal of corrupt local officials.
In this paper, we examine whether politicians in China use the Community Party of China’s flagship newspaper, the People’s Daily, to coordinate the reporting of corporate news in China. We posit, and find, that the People’s Daily is more likely to publish an article about a firm when there is a material degree of disagreement in the sentiment of recent domestic news articles about that company, ceteris paribus. This effect is more pronounced if the articles are published in commercially-oriented newspapers, during periods of heightened political sensitivity (years of a National Congress), and following President Xi’s highly visible state media visit in 2017. More importantly, we find that this disagreement dissipates / is attenuated following the publication of a positive PD’s article, consistent with subsequent news reporting implicitly anchoring their articles upon the PD’s message.
Institutions and norms have increasingly been recognized as fundamental determinants of economic and political development. Institutions are rules that recognized authorities create and enforce. Norms are long-standing patterns of behavior, shared by a subset of people in a society or organization. These factors play a role in all organizations, including governments, firms, churches, universities, gangs, and even families. In this book we: (1) present a set of concepts, for example, institutions, norms, property rights, and transaction costs, used in Institutional and Organizational Analysis (IOA) that link institutions and norms to economic performance; (2) use the same set of concepts to better understand political organizations and performance; and (3) build a framework based on those concepts for understanding divergent developmental trajectories of nations around the world. In Parts I and II, we define the concepts needed to understand how economic activity is organized and how economic and political outcomes are shaped by institutions and norms. In Part III, we add the comparatively recent work on beliefs and leadership to better understand the fundamental question of why there has not been convergence in economic and political performance across countries.
This paper summarizes the content of a new book (A Research Agenda for New Institutional Economics, Edward Elgar, 2019) that explores priority issues for future research in new institutional economics. Drawing on a diverse group of authors, most from a newer generation of institutionalists, this Research Agenda consists of 30 brief essays probing issues at the forefront of NIE, including government, contracts, property rights, norms, culture, and beliefs. Essays also examine emerging questions underexplored by NIE, areas where new technology and evolving circumstances raise novel issues, and tools, techniques, and approaches, such as how to measure institutions, use experiments, and exploit big data and machine learning.
Why is it that some countries become rich while others remain poor? Do markets require regulation to function efficiently? If markets offer an efficient way of exchanging goods, why do individuals even create firms? How are economic transactions organized in the absence of a state that could enforce contracts and guarantee property rights? Institutional Economics has allowed social scientists to answer many fundamental questions about the organization and functioning of societies. This introduction to Institutional Economics is concise, yet easy to understand. It does not only cater to students of economics but to anybody interested in this topical research area. Both, formal and informal institutions, such as customs, habits, and traditions, are discussed with respect to their causes and consequences as it has become apparent how important they are for economic growth and development
We study social learning in networks where agents share information selectively. Contrary to standard convergence results, we show that if agents hold even minor misperceptions about the selective sharing, then allowing the quantity of external information to grow indefinitely can lead to divergence of beliefs. Specifically, if quality of external information is sufficiently low, agents’ friends in the network are able to bias their beliefs towards any preferred state. Consequently, to avoid polarization, it is optimal to aggregate external signals into less frequent and more precise communications.
While most of the literature on the design of trade agreements and trading institutions takes the political pressure governments face to be exogenous, this paper endogenizes politics in a standard model for studying trade policy design questions. One can use this simple modeling framework to distinguish between the dynamics induced by exogenous political shocks and endogenous incentives of political actors, unifying these two strands of literature. The modeling framework can also provide fuller answers to trade policy design questions by elucidating the interactions between exogenous and endogenous political forces. Applications to tariff caps and the escape clause show that important insights are missed if attention is restricted to exogenous political shocks. Most notably, endogenous politics destroys a traditionally-defined escape clause's ability to provide flexibility in the face of political shocks when lobbies use the flexibility to seek rents. This can explain why WTO Safeguard use is conditioned on measurable economic indicators.
Firms have incentives to influence regulators' decisions. In a dynamic setting, we show that a firm may prefer to capture regulators through the promise of a lucrative future job opportunity (i.e., the revolving-door channel) than through a hidden payment (i.e., a bribe). This is because the revolving door publicly signals the firm's eagerness and commitment to reward friendly regulators, which facilitates collusive equilibria. Moreover, the revolving-door channel need not require an explicit agreement between the firm and the regulator, but may work implicitly giving rise to an industry norm. This renders ineffective standard anti-corruption practices, such as whistle-blowing protection policies. We highlight that closing the revolving door may give rise to other inefficiencies. Moreover, we show that cooling-off periods may make all players worse off if timed wrongly. Opening the revolving door conditional on the regulator's report may increase social welfare.
This article explores the decision-making process of a small French agency that was in charge of the regulation of the supply side of the proto-industrial part of the economy in the 18th century France, characterized by absolutist monarchy. The question we ask, is whether, against the odds, its rules and procedures endowed the Bureau du Commerce with a capacity to act as an agent of change, or whether its de jure constitution was de facto overwhelmed by the pressure of a thoroughly rent-seeking environment. We analyze the case of the distribution of privileges, i.e. individual franchises and rents, to private entrepreneurs. Policy implementation responded to a bottom-up process whereby each applicant sent his demand to the Bureau in Paris, which then investigated the case and decided whether or not to support him. Thanks to well-kept archives, we have been able to code the 535 individual applications that were received and processed between 1700 and 1791. We identified the conclusions reached, the parties and experts involved in each case, and the qualitative arguments leveraged by each of them. We show that decisions issued by the Bureau are correlated to the positions expressed by the key voices in the deliberation process (for or against each submission) and by the substantive arguments that they raised within the procedure. Broad or impersonal criteria that shaped the distribution of rents to private manufacturers can thus be observed ex post. The fact that they remain stable for a long period characterized by multiple rulers and substantial political changes suggests that the mix of hierarchic division of labor, information gathering, and collegial deliberation actually supported a rather consistent and impersonal development policy despite the absolutist monarchy that ruled at that time.
Although a large literature exists in political science on the nature of hybrid regimes, few studies explore their direct redistributive consequences. As such, we investigate how the rise of Turkey’s competitive authoritarian regime, via the incumbency of President Recep Tayyip Erdoğan in 2014, has led to the selective distribution of public housing project contracts, as administered by the state-run Turkish Mass Housing Development Administration (TOKİ). Firstly, with the incumbency of Erdoğan, we find robust evidence that provinces voting in favour of his Justice and Development Party (AK Parti or AKP) receive more TOKİ contracts, whilst those with larger vote share differentials between the Republican People’s Party (CHP), the main opposition party, and the AKP receive fewer. However, before Erdoğan’s arrival, we also find that the vote shares of either party remain strongly uncorrelated with TOKİ redistribution. Consequently, by exploiting the institutional shift of the political landscape between 2003 2018, we provide suggestive evidence that the rise of competitive authoritarianism via Erdogan has transformed TOKİ from a once neutral public good to one of pure political graft.
We evaluate the effect of the central government's rotating crackdowns (2016-2017) on the environmental performance of cities and firms in response to China's air pollution crisis. During one-month crackdowns, concentrations of sulfur dioxide (SO2) at coal power plants in targeted cities fall on average by 25-27%, but increase once scrutiny ends. Pollution reverts earlier at state-owned plants accountable to the central government, compared to plants accountable to the local (city) government. Our findings suggest that crackdowns visibly demonstrated central government effort but did not result in lasting environmental improvement.
In this paper, we study how policies limiting the spending capacity of local governments may lead to a reduction in corruption. We exploit the extension of one such policy, the Domestic Stability Pact (DSP), to Italian municipalities with less than 5,000 inhabitants that occurred in 2013. Using a ‘local Difference-in-Differences’ approach, we show that the extension of the DSP led to a substantial decrease in recorded corruption rates. This effect emerges only in areas in which the DSP put a binding cap on municipal capital expenditures, in line with the hypothesis that investments and procurement are naturally prone to corruptive phenomena. We also show that i) the reduction in corruption is linked to accountability incentives; ii) and it is not just a mechanical consequence of the decrease in investments, by pointing out evidence of an improvement in the corruption-proofness of public spending. We then estimate the impact of the extension of the DSP on local welfare, finding a null effect. Overall, our findings suggest that budget constraints might induce local governments to curb expenditures in a way that dampens their exposure to corruption without depressing local welfare.
Using firm-level data, I analyze one of the largest economic experiments of the twentieth century, the fall of communism. After communism ended, post-communist economies experienced a sharp decline and slow recovery of output. This paper studies the output pattern of these countries using microdata from Hungary from both communist and market economy times (1986-1999). I propose a novel decomposition of output change which allows me to quantify the role of productivity, inputs and allocative efficiency in output change. I find that the majority of the output drop is accounted for by a reduction in labor input. In contrast, the recovery in the 1990s largely reflects gains from within-industry reallocation of inputs toward more productive firms. Next, I explore the mechanisms through which the fall in labor and the gains in allocative efficiency operated. I find that during communism, a large share of firms employed an inefficiently high number of people given the wages firms paid. During the transition, these firms saw their employment decrease 40% more relative to other firms. In particular, these firms shed more low-educated, blue-collar, older, and female workers. The evidence is consistent with the interpretation that the corporate sector in communism provided a social safety net in addition to producing output. With regard to the recovery, I provide evidence consistent with the bank privatization having improved allocative efficiency of capital by removing frictions caused by state banks.
Electoral district borders regularly cross the borders of local governments. At the same time, legislatures allocate resources using transfers to local governments. Political parties may try to target these transfers in order to win elections, but can only do so imperfectly because of border mismatch. This border mismatch creates inequality: otherwise similar local governments receive different transfers depending on the district map. To show this, I incorporate border mismatch into a model of political competition and test the predictions using data on transfers from U.S. states to counties. The results demonstrate a novel link between redistricting and voter welfare.
Institutions of justice, like prisons, can be used to serve economic and other extrajudicial interests, with lasting deleterious effects. We study the effects on incarceration when prisoners are used primarily as a source of labor using evidence from British colonial Nigeria. We digitized sixty-five years of archival records on prisons from 1920 to 1995 and provide new estimates on the value of prison labor and the effects of labor demand shocks on incarceration. We find that prison labor was economically valuable to the colonial regime, making up a significant share of colonial public works expenditure. Positive economic shocks increased incarceration rates over the colonial period. This result is reversed in the postcolonial period, where prison labor is not a notable feature of state public finance. We document a significant reduction in contemporary trust in legal institutions, like police, in areas with high historic exposure to colonial imprisonment. The resulting reduction in trust is specific to legal institutions today.
We study criminal incentives exploiting the devastating shock of the 1995 Kobe earthquake. Evidence shows that the earthquake decreased burglaries but left other crime types unaffected. The effect stays significant even after controlling for unemployment, policing and income. We corroborate this by instrumenting damages with the distance from the earthquake epicentre. These findings survive various robustness checks under different specifications. The evidence is consistent with a simple theory of crime, value and specialization. We conclude that burglars respond to damages that devaluate their prospective takings. Yet, they cannot shift their specialization and substitute burglaries with other crime types.
This paper is the second part of the first comprehensive examination of how China’s courts adjudicate eminent domain cases. Our new dataset, including 2,376 decisions issued by all of the 31 high people’s courts in China from 2014 to 2017, confirms the dominance of procedure in courts’ adjudication of eminent domain cases. What’s more important, utilizing the revision of China’s administrative litigation law as an exogenous shock, we are able to identify whether the emphasis on procedure is because of judges’ belief in procedural justice or because procedural rules provide a convenient, cost-effective way for judges to make decisions, which we call it a strategic choice. Specifically, the revision of China’s administration litigation law, which took effect on May 1, 2015, significantly increased the workload of judges by requiring Chinese courts to accept cases without a preliminary screening as far as there is a plausible cause. The sudden increase of workload will affect the behaviour patterns of judges with regard to procedural arguments if the emphasis on procedure is mainly a strategic move; while should have no effect if it is a belief. Our regression results confirm that the upholding rate of procedural mistake (PM) claims of the property rights holders significantly increases after the reform, the increase is mainly contributed by courts experienced larger increase in workload. Furthermore, we established that upholding PM is less effective in protecting property rights holders after the reform, especially in courts experienced larger increase in workload. Overall this empirical study not only reveals the dominance of procedure in Chinese courts’ adjudication of eminent domain disputes, but also demonstrates that it is a strategic choice under the pressure of workload instead of a belief in procedural justice, and only provides weak protection for property rights holders.
Historical rates of firearm access in the United States remain uncertain. Using hand-coded vital statistics records, we calculate the fraction of recorded suicides committed with a firearm as a proxy to separately assess state firearm access rates for black and white households in the U.S. South from 1913 until 1999. Our estimates support the historical interpretation of early 20th century state-level gun regulations as efforts to disarm black residents in the Jim Crow South, followed by black residents successfully re-arming themselves during the civil rights movement. We find that firearms offered black residents an effective means of self-defense, while also calling into question the classification of firearm deaths recorded as accidents. Using records of lynchings from 1913 to 1949, we find evidence that the number of black lynchings decreases with greater black firearm access. During the height of the civil rights movement (1954 to 1968), we observe that white homicide deaths increased with black firearms. Black homicide deaths, however, are not sensitive to black firearms. We instead observe that rates of black ``accidental death by firearm'' _decreased_ with black firearms, a result which supports historical anecdotes of frequent misclassification of black homicides, including lynchings, as accidents or of causes unknown.
We study the long-shadow of local political history for socio-economic outcomes and individual attitudes today. Following evidence on medieval communal and maritime republics, we conceptualize inclusive or exploitative social contracts as resulting from the interplay between the historical incentives of ruling elites and the behavior of the population at large. Tracking the emergence, territorial evolution and disappearance of each sovereign polity in pre-industrial Italy, we provide novel measures of intensity of exposure to different republics over time and the number of changes in the identity of rulers (i.e. political stability) at municipality level. Looking at the intensity of exposure within self-governed polities, we find that a longer rule of communal republics increases fiscal compliance, while the forceful annexation to the rule of the maritime republics and being historically ruled by more polities reduce it. Contribution to public finance go hand-in-hand with actual fiscal policies and is positively associated to measures of generalized morality (organ donations) but crowds-out private mutual help. Exploiting variation in the distribution of surnames in each municipality we show that political history shapes population diversity today in line with different attractiveness of historical legal regulations. Identification strategy also exploits exogenous variation in the exposure to the different polities in the locations forcefully annexed to the rule of the republics in instrumental variable regressions. Findings suggest that historical political instability and selected migration are reinforcing mechanisms of the persistence of multiple types of social contracts until today.
Although the importance of political legitimacy is well recognized, the social sciences provide no conceptual framework to study its endogenous dynamics and implications. This paper develops a conceptual framework to study endogenous political legitimacy and its impact on political power, institutions, and policies. The paper builds on this framework to construct a context-specific model that facilitates a historical analysis of England's transition to a constitutional monarchy. The analysis highlights the importance of legitimacy and legitimacy-related actions in this transition. It provides a consistent and rational explanation for many historical observations that are unaccounted for by the predominant explanations for this transition.
In this paper, we outline what we term the “Aristotle tradeoff:” legislated homogeneity in asset ownership (which is costly because it reduces gains from specialization yet beneficial in that it yields better alignment among voters) versus market-driven asset ownership (which generates gains from specialization but yields inferior majoritarian decision-making). In the presence of the tradeoff, the optimal institutional design delivers a second-best result. The ancient Greeks, who designed the first successful democracies and influenced those that followed, understood this tradeoff and, we argue, succeeded because they acted on that understanding. We pursue this argument in a discussion of the political institutions of two of ancient Greece’s most successful city-states (poleis), Athens and Sparta, who responded to the tradeoff in fundamentally different fashions. The discussion illustrates that successful democratic decision making depends on the way voter incentives are affected by the ownership of assets whose value depends on policy decisions. Modern democracies ignore this lesson at their peril.
This study exploits the confiscation and auctioning off of Church property that occurred during the French Revolution to assess the role played by transaction costs in delaying the reallocation of property rights in the aftermath of fundamental institutional reform. French districts with a greater proportion of land redistributed during the Revolution experienced higher levels of agricultural productivity in 1841 and 1852 as well as more investment in irrigation and more efficient land use. We trace these increases in productivity to an increase in land inequality associated with the Revolutionary auction process. We also show how the benefits associated with the head-start given to districts with more Church land initially, and thus greater land redistribution by auction during the Revolution, dissipated over the course of the nineteenth century as other districts gradually overcame the transaction costs associated with reallocating the property rights associated with the feudal system.
The misallocation of resources in the government and private sectors due to cronyism are widely perceived to be major impediments to economic growth around the world. Distortions in the government and private sectors are typically viewed as distinct and independent sources of inefficiencies. We document that they are related in a way that drastically amplifies efficiency and welfare costs. While the government does not intervene in resource allocation in private markets directly, we show that when members of a group gain access to political power, private firms establish links to the group by recruiting some of its members as executives. Specifically, we document that following a presidential election in Korea, private banks appoint executives from the new president's networks. Subsequently, these banks show a bias in credit allocation to firms linked to the new president's networks similar to government banks. Micro-level data on loans and interest rates, combined with variation in network links for the same firm across lenders over time allows us sharpen the identification of the results. In a parsimonious model of credit allocation, we show that welfare costs increase dramatically when government and private banks share a bias toward the same group of firms. Intuitively, an abundance of funding for in-group firms allows them to overinvest inefficiently, whereas other firms' lack of funding forces them to forego highly profitable investments. If government and private banks' bias in credit allocation is not targeted toward different groups of firms, investment distortions are markedly lower.
The origins and global variation of democratic political institutions are not well understood. This study tests the hypothesis that the Catholic Church’s medieval prohibition on kin marriages fostered participatory institutions by dissolving strong extended kin networks. First, I show that weak pre-industrial kin networks are positively associated with countries’ democracy scores. At the same time, medieval Church exposure robustly predicts weak kin networks across countries, European regions and ethnic societies. In a difference-in-difference analysis, I then provide historical evidence that exposure to the Church fostered the formation of medieval communes – self-governed cities with participatory institutions that many scholars have identified as critical precursors for national parliaments. Moreover, within medieval Christian Europe, stricter regional and temporal cousin-marriage prohibitions are associated with increased formation of commune cities. Lastly, I shed light on one mechanism, civicness, and show that weak kin networks are associated with higher political participation.
Why do autocrats implement new technologies aimed at increasing transparency - to improve accountability or to create a veneer of democracy? This paper studies the effects of the technology of video monitoring of elections in one prominent authoritarian regime, Russia. I exploit a discontinuity in the assignment of webcams to polling stations in the 2018 Presidential election to estimate causal effects. I find that video monitoring reduces voter turnout by 5% and results in 8.5% fewer votes cast for the incumbent, consistent with an improvement in electoral accountability. However, I also find evidence of geographical displacement of votes from monitored to unmonitored polling stations that compensate for around half of the direct effect. Using a survey experiment before the 2019 local elections, I further show that increasing awareness about video monitoring improves voters' perceptions of electoral integrity and increases their willingness to vote. Consistent with existing theories, autocrats might be willing to invest in sophisticated technologies to increase trust in public institutions and prevent revolt.
We propose a theory that explains variations in the willingness and ability of incumbent political and economic elites to adapt to powerful new ideas, policies, and technologies. Innovations often require substantial changes to existing patterns of social and economic activity and sometimes disrupt existing sources of income and political control. In our model, the elite use fiscal policy and regulation to manipulate prices and redistribute income. They may exploit the innovation themselves, block the innovation, allow it and share the rents with the innovators, or encourage entry to the point that rents are competed away. We focus on structural features of the innovation that determine the elite's optimal policy, driven by expected benefits. We establish the role of the following features of innovations: whether their impact is broad or narrow; whether they complement or compete with the elite's sources of income; whether they are mobile, concealable, and easily replicable; whether they exhibit economies of scale.
Once seen as a weapon of freedom, informational technology has drastically transformed state capacity—often with unintended consequences. Our study analyzes the rise of the digital state. We do so by proposing a theory of how recent trends in monopoly power fuelled the demand for information technology, and how these technologies, in turn, spilled over to the state. In our model, we show information technologies that allow monopolists to extract surplus from consumers also enable states to more efficiently exercise a monopoly of violence. Since this technology transforms the costs and consequences of repression, we study how the digitization of the state impacts preferences for (digital) democracy and (digital) autocracy. A key insight is that information may reduce the costs of autocracies to deploy repression, which in turn makes autocracy more palatable to elites and citizens. We provide empirical insights into main components of our model, using newly collected data on state technological adoption.
This paper investigates the causal effect of police response times on decisions re-garding domestic violence incidents. To victims of domestic violence, seeking formal support is costly. When they do so, the quality of initial formal interactions with po-lice emergency response teams may be determinant to victims' cooperation with the police. Using unique administrative data on 911 calls, we find that longer police re-sponse times decrease the likelihood of a repeat victimization report among first-time victims. We also show that longer response times raise legal attrition and lower the stringency of legal actions. To address endogeneity concerns, we exploit case-level variation in response times as a result of exogenous changes in capacity con-straints of officers attending other crimes taking place within the same hour. Our results show that police capacity constraints are determinant to the success of vic-tims' initial engagement with formal support systems.
Under which conditions does intergroup contact lead to conflict? We provide a novel answer to this question by highlighting the role of reputation mechanisms in sustaining cooperation. Punishment-based reputation (a “culture of honor”) and reputation based on image scoring (indirect reciprocity) can both deter defection in one-time interactions within groups. Yet these reputation mechanisms can be incompatible in intergroup interactions. Using a game theoretic model, we show that injecting pools of individuals from a punishment-based culture into a culture of image scoring can lead to widespread intergroup conflict. Cooperation is a more likely outcome if the cultures that interact use a similar reputation mechanism. The theoretical framework helps us explain a variety of phenomena, such as variation in immigrant crime rates and patterns of outgroup discrimination.
This paper examines the relationship between ethnic-based gender norms and conflict-related sexual violence. We generate a novel dyadic dataset that contains information on the ethnic identity of all the actors involved in ethnic civil conflicts in Africa between 1989 and 2009 and their use of sexual violence. We exploit ethnographic information to construct a new gender inequality index at the ethnicity level that captures deep-rooted gender norms. First, we find that gender-unequal armed actors are more likely to be perpetrators of sexual violence. Second, we consider the cultural distance in gender norms between the combatants. Applying a gravity approach, we find that sexual violence is driven by a specific clash of conceptions on the appropriate role of men and women in society: sexual violence increases when the perpetrator is more gender-unequal than the victim. These patterns are specific to sexual violence and do not explain general violence within a conflict. Differences in other cultural dimensions unrelated to gender are not associated with conflict-related sexual violence.
We examine the long-run economic impact of the Dissolution of the English monasteries in 1535 during the Reformation. Since monastic lands were not encumbered by inefficient types of customary tenures linked to feudalism, the event provides variation is the longevity of feudal institutions which is plausibly linked to labor and social mobility, the productivity of agriculture and ultimately the location of the Industrial Revolution. We show that parishes impacted by the Dissolution subsequently had a greater share of the population working outside of agriculture, experienced a `rise of the gentry', higher investment, innovation and productivity in agriculture, and eventually higher levels of industrialization. Our results are consistent with an explanation of the Industrial Revolution which emphasizes the commercialization of society as a key pre-condition for taking advantage of technological change and new economic opportunities.
Religious festivals are widespread and persistent features of social life worldwide. Even in poorer societies, households and communities spend nontrivial shares of their income on festivals. What are the economic and social consequences of religious festivals? We study Catholic saint-day festivals in Mexico, exploiting two features of the setting: (i) festival dates vary across the calendar and were determined in the early history of towns during conquest, and (ii) there is considerable variation in the intra-annual timing of the main agricultural seasons. We compare municipalities where festivals overlap with planting or harvest to municipalities where they do not overlap to examine the impacts of festivals on long-run economic development and social outcomes. We find that having festivals during the planting season is associated with worse development outcomes, but higher social capital and lower income inequality. A likely mechanism is that festival spending reduces agricultural investment in the planting season by liquidity-constrained households. At the same time, redistribution via festival-related consumption may be especially valued during the planting season when food stores are low, leading to higher social capital. This suggests that festivals in liquidity-constrained times have social capital benefits, helping explain their persistence despite their economic consequences.
Much of the modern trade among humans occurs via markets, yet our understanding of how market exposure shapes our values and institutions is still poor. I investigate a long-standing debate in economics on whether markets foster or deplete unwritten (norms) and written (bylaws) rules that constrain opportunistic behavior and foster cooperation. Answering this question is very difficult because markets are not randomly assigned. I use variation in market exposure across groups of the Arsi Oromo people in Ethiopia, who have common ancestry, religion, and occupation. Markets emerged inadvertently from garrisons that Menelik - the emperor of Ethiopia - established at strategic locations after defeating the Arsi. These markets are held twice a week and are characterized by asymmetric information and the absence of third-party verification. I measure norms as the individual propensity to cooperate if others do the same via a public goods games in the strategy method. Bylaws are measured as written down regulations on the use of natural resource. I find that groups more exposed to markets have stronger norms of cooperation as well as better quality of regulations. This finding is consistent with models where asymmetric information and incomplete contracts create a demand for norms and bylaws, in the absence of which neither party would benefit from the gains of trade. In line with such a mechanism, I find no effect when exposure is from markets without asymmetric information. Survey and experimental data also show that individuals closer to markets hold optimistic beliefs about cooperation and rule following by strangers.
There is a growing literature linking economic shocks to changes in values and social norms. Here, we investigate the possibility that the 2008 economic crisis, largely perceived as the consequences of wrongdoings in the financial sector and to have been poorly handled by governments, has generated a shift in ethical values. We are especially interested in stated tolerance towards dishonest behaviours (such as lying when selling second hand goods or inflating an insurance claim for example). Using data from a survey collected in 2010 (the EBRD LITS2 survey) in 35, mostly East European, countries, we report that respondents directly affected by the 2008 crisis, are systematically more accepting of dishonest behaviours. The effect is small and possibly only correlational, but it is robust to specification change, Oster’s test on unobservable bias and stronger when the dishonest behaviour described negatively impacts the state or businesses rather than citizens. This is consistent with the psychology literature, which suggests that individuals cheat more in contexts where they can self-justify doing so (e.g. here as a compensation for being negatively impacted by the crisis). Simultaneously, citizens who live in areas where the crisis has hit the hardest express a stronger rejection of dishonest behaviour. This effect is larger in magnitude, consistently found across all the behaviours investigated, and more credibly causal, as it is confirmed with a split-sample regression. Again, this is consistent with insights from the psychology literature indicating that respondents exposed to dishonest behaviours committed by individuals perceived as out-group members, will respond by rejecting dishonesty more strongly. Overall, our finding suggests a tightening of moral values after the 2008 crisis in the short-run.
This paper revisits the role of human capital for economic growth among non-industrialised ethnic groups. We hypothesize that exposure to rare, natural events drives curiosity and prompts thinking in an attempt to comprehend and explain the phenomenon, thus raising human capital —directly and indirectly. We focus on total solar eclipses as one particular trigger of curiosity and empirically establish a robust relationship between their number and several proxies for economic prosperity: social complexity, technological level, writing and population density. Variation in solar eclipse exposure is exogenous as their local incidence is randomly and sparsely distributed all over the globe. Moreover, unlike other natural phenomena, solar eclipses do not destroy capital, either human or physical. We also offer evidence compatible with the mechanism we propose, finding more intricate thinking in ethnic groups more exposed to solar eclipses. In particular, we study gods’ involvement in human affairs, the play of strategy games and the accuracy of the folkloric reasoning for eclipses.
Price booms in labor-intensive exports are expected to benefit labor. The surging demand for labor can increase labor coercion, though, if labor is relatively scarce. Using a unique natural experiment, the Lancashire cotton famine in 1861-1865 that prompted Egypt to quadruple its cotton output, and a novel data source, Egypt’s population censuses of 1848 and 1868, I document that the cotton famine had a positive impact on labor coercion in rural Egypt. Agricultural slavery emerged, with an influx of imported slaves from Sudan. Owners of large estates confiscated areas with larger (non-slave) local populations. It also had a positive impact on the non-coercive employment in agriculture of local labor. I explain these findings by the scarcity of local labor relative to cotton expansion, and by large landholders' exclusive right to coerce local labor. The findings accentuate the far-reaching unintended consequences of globalization on labor in poorer economies.
Social norms, the shared behavioral standards of one's community, regulate behavior in many contexts and are important determinants of economic development. While all societies have social norms, people in some countries value adherence to the norms more than in others. According to cultural evolutionary theory, the key determinant for why some societies emphasize norm adherence more than others is the experience of negative collective shocks. Evolutionary selection is thought to favor psychological traits that promote cooperation within groups in response to collective negative shocks, including stronger adherence to existing social norms. Based on a stylized model, I test this hypothesis by linking occurrences of natural disasters and significant economic downturns to large-scale survey data from around the world. I find that (i) individuals who have experienced collective negative shocks place more importance in norm adherence today and (ii) individuals who have experienced higher economic growth rates value norm adherence less.
What is trust and how can we measure it? Social scientists widely accept as an intuitive truth that trust impacts positively on the economic success of societies. By now there is a large empirical literature studying and quantitatively assessing such a relationship. Yet, there is no consensus on how trust can be properly measured. In this paper, I survey the literature and present an alternative to the common approaches on measuring trust. Traditionally, trust has been identified by relying on surveys—directly asking people if, and how much, they trust their fellow countrymen—and/or on experiments—creating a perfectly controlled environment where the role of trust can be properly isolated and identified. Both approaches have important limitations: the former is prone to misidentification, while the latter is limited by scale issues. I argue that it is possible to capture trust-levels in a real-world context by locating proxies: refund policies implicitly account for the level of trust that retailers posit in their customers and represent a tacit measure of their client’s overall trustworthiness. By constructing an index of refund policies of stores that sell a similar set of homogenous goods across different regions/countries, we can get a reliable estimate of trust-differences across these regions/countries. I use Ikea as a study case of how such a proxy can be built.
In their seminal 2001 work, Acemoglu, Johnson, and Robinson (AJR) argued that institutions influence economic development, using the logarithm of settler mortality as an instrument to establish a causal effect. A number of economists and other social scientists have challenged this work in terms of both data and identification strategy. One of these criticisms concerned the IV estimated coefficients and standard errors, which were nearly twice as large as the OLS coefficients and standard errors. My research uses machine learning to test the robustness of AJR's findings. Using the AJR dataset, which I randomly divide into training data and testing data, I am able to predict the average protection against expropriation risk from settler mortality. These predicted values of property rights protection are then regressed on per capita GDP growth. My results indicate a strong and positive effect of property rights protection on growth, consistent with AJR's earlier results. Moreover, the use of machine learning to obtain institutional values yields estimates close to the OLS estimates, unlike AJR. Removing African countries and neo-European countries such as Canada, Australia, USA, and New Zealand does not alter the sign and significance of the coefficient of interest. These results suggest that machine learning can be helpful to economists facing data issues.
A growing literature studies how cognitive and noncognitive skills influence labor market outcomes beyond their effects via years of schooling. This paper uses a rich longitudinal data set from rural China to study the relationship between childhood cognitive and noncognitive skills and labor market outcomes. Results show that cognitive skills have strong explanatory power for wages when young adults are in their late 20s, even after controlling for years of education. We also find gender differences in the returns to various noncognitive skills, including internalizing behavior, externalizing behavior, and educational aspirations.
Nepotism is one of the most chronic pathologies within public administrations around the world and one especially endemic to developing countries. Yet, empirical evidence on the impact of this behavior on the functioning of the state is scarce. In this paper, I present empirical evidence on how family connections within the public administrations could distort the process of hiring, promotion, and compensation of civil servants, and how these strategically respond to the enforcement of anti-nepotism legislation. I also investigate how the presence of nepotistic career paths ultimately relates to the performance of governmental agencies and individual bureaucrats. My analysis focuses on the Colombian public administration and its entire bureaucratic system. I use un-anonymized administrative data on the universe of civil servants and their family members in the first degree of consanguinity. Based on this, I reconstruct bureaucratic family networks and full career paths of public servants. My empirical strategy exploits discontinuities in anti-nepotism legislation and the political turnover of top bureaucrats to evaluate the impact of kinship ties on civil servants' outcomes. As opposed to most of the literature on patronage and political quid-pro-quo exchange, I emphasize the role of kinship networks within the complete hierarchical structure of the state, from top managers to low tier bureaucrats, regardless of the political affiliation of individuals and their inherent jurisdictional power.
Public schooling systems are an essential feature of modern states. These systems often developed at the expense of religious schools, which undertook the bulk of education historically and still cater to large student populations worldwide. This paper examines how Indonesia's long-standing Islamic school system responded to the construction of 61,000 public elementary schools in the mid-1970s. The policy was designed in part to foster nation building and to curb religious influence in society. We are the first to study the market response to these ideological objectives. Using novel data on Islamic school construction and curriculum, we identify both short-run effects on exposed cohorts as well as dynamic, long-run effects on education markets. While primary enrollment shifted towards state schools, religious education increased on net as Islamic secondary schools absorbed the increased demand for continued education. The Islamic sector not only entered new markets to compete with the state but also increased religious curriculum at newly created schools. Our results suggest that the Islamic sector response increased religiosity at the expense of a secular national identity. Overall, this ideological competition in education undermined the nation-building impacts of mass schooling.
To what extent can heroes coordinate and legitimize otherwise strongly- proscribed and potentially repugnant political behavior? In this paper, we exploit the purposefully arbitrary Noria rotation of French regiments to measure the legitimizing effects of heroic human capital, gleaned through exposure to the pivotal Battle of Verdun under General Philippe Pétain in 1916. We wed this with a unique newly declassified dataset of 97,242 individual collaborators with the Nazis collected by French army intelligence in 1945 to show that, during the Pétain-led Vichy regime (1940-44), municipalities that raised troops that served under Pétain at Verdun later housed more collaborators with the Nazis than otherwise similar municipalities. Individuals from these municipalities were 5% more likely to join Fascist political parties or paramilitary groups that conducted the internal repression of the regime against Jews and resistants, or to directly join German military units. We interpret these results as reflecting the role that Verdun played in generating both credentials for leadership and organizational capacity that legitimized otherwise proscribed values, forging political identities that proved durable in explaining the Left-Right divide in France throughout much of the post-war period, and that were particularly salient in times of social and political crisis.
Slavery had long dominated world labor relations before its demise in the nineteenth century. This paper shows that changing economic interests determined shifts in the political and ideological support for slavery within the US South. We exploit the competitive forces generated by the US Westward territorial expansion between 1810 and 1860 to identify changes in local economic incentives to the use of slave labor. We show that areas losing comparative advantage in the production of cotton with respect to wheat: (i) changed their production decisions and reduced their use of slavery, (ii) became less likely to politically defend slavery as indicated by the likelihood of legislators to vote against slavery in Congress and of counties to vote against secession, (iii) experienced changes in political outcomes as shown by electoral returns of presidential and gubernatorial candidates and roll-call behavior of Congressional representatives, and (iv) experienced a broader social transformation as shown by an increase in the free black population, and changes in local newspapers' supply of slavery-related content.
A central concern for racial and ethnic minorities is having an equal opportunity to advance group interests via the political process. There remains limited empirical evidence, however, whether democratic policies designed to foster political equality are connected causally to social and economic equality. In this paper, we examine whether and how the expansion of minority voting rights contributes to advances in minorities’ economic interests. Specifically, we consider how the political re-enfranchisement stemming from the passage of the 1965 Voting Rights Act (VRA) contributed to improvements in the relative economic status of black men during the 1960s and 1970s. Using spatial and temporal variation in federal enforcement of the VRA, we document that counties where voting rights were more strongly protected experienced larger reductions in the black-white wage gap between 1950 and 1980. Our analysis of mechanisms suggests that minority political influence improved blacks’ relative position through increased public employment, fiscal redistribution, as well as through implementation and enforcement of group-favoring labor market policies, such as affirmative action and anti-discrimination laws.
Inequality is an important issue in many countries, and intergenerational mobility is one of the key mechanisms for alleviating inequality. What drives mobility? Why do some areas generate higher rates of mobility than others? This paper has two objectives. First, using individual data from censuses and surveys, I characterize the features of intergenerational mobility in China based on education and occupation for cohorts from 1949 to 1977. Second, I empirically investigate how intergeneration-transmitted aspirations can contribute to the emergence and persistence of social mobility. I report several findings. First, I show that there are substantial geographic variations in education- and occupation-based intergeneration mobility across prefectures in China. Second, I empirically examine the role of aspiration in explaining contemporary social mobility. Using the plausibly exogenous success rate for the bureaucrat selection examination (Keju) in ancient China as a proxy for historical aspirations and taking advantage of the extensive changes in prefecture boundaries since the founding of the People's Republic of China (PRC) in 1949, I find that aspirations increase upward mobility, and the effect happens to individuals in the low-to-middle quintiles in the education distribution. Third, using the victims of the anti-intellectual movement (the Cultural Revolution) in the 1970s as a proxy for the perceived drop in return to education, I show that return to education had a positive impact on determining upward mobility. Finally, I nd that in environments with more aspiration, individuals' upward mobility is more responsive to changes in the perceived return to education.
When are differential treatment policies—such as preferential treatment in school choice, affirmative action in university admissions, and gender equity policies in labor markets and in promotions within organizations—justified by efficiency concerns? This paper proposes an assignment model of differential treatment, where a policymaker assigns agents to different treatments or positions in order to maximize total surplus, based on the agents’ characteristics and on noisy information about their types (i.e. abilities or productivities). I provide necessary and sufficient conditions on the agents’ signaling structures which characterize whether surplus maximization requires differential treatment or not, in a general non-parametric information framework. I show that under reasonable conditions the optimal assignment policy is characterized by an index which measures the agents’ expected marginal benefits from different treatments, and also examine further conditions on the bias and informativeness of signaling structures that determine the efficiency implications of differential treatment. I examine applications of this model to inequality, decentralization, and organizational design. The model also provides novel questions and predictions for empirical research on the economics of discrimination.
This paper investigates how women’s promotions in the workplace affect bargaining in the household. I exploit the design of a promotion programme for women in 27 Bangladeshi garment factories, by comparing women who were quasi-randomly selected for the programme to the shortlisted runners-up. Results using three different estimation approaches (OLS with post-double selection Lasso, regression discontinuity, and matching) show that women’s bargaining power increases as a result of the promotion. The effects are largest for the share of income households spend on assignable goods for women (especially clothing and accessories) and remittances. The latter appears to mask expenditures on children, since remittances increase most for women whose children live with other relatives. I find that these direct effects of the promotions are amplified by impacts on women working as subordinates of the new female managers. Using the quasi-random assignment of sewing-line operators to production lines for identification, I observe that women exposed to a female manager have more say in decision-making in the household, especially about their own mobility. Overall, I find suggestive evidence that both the direct and the indirect impacts are driven by women gaining confidence to get involved in bargaining, rather than income effects that ease the budget constraint or changes in the relative wage in the household.
How do people interpret government corruption reported in the media? We use corruption news released by the anti-corruption campaign in China that began in 2013 to causally examine its impact on people’s self-reported views toward fairness in society. Using a difference-in-differences approach, we find that corruption news deteriorates belief in fairness. The results are robust after controlling for regional cultural differences and local corruption severity. The possibility of reversal causality is addressed by controlling for prior corruption awareness. To examine the channel through which corruption news affects beliefs, we use novel Baidu Searching Index data for the term “anti-corruption (fanfu)” as a proxy for corruption awareness. Our analysis shows that corruption exposure increased corruption awareness and that an increase in awareness is associated with greater deterioration in belief in fairness. This indicates that the anti-corruption campaign increased people’s awareness about the severity of corruption and suggests that the campaign may have had unintended consequences for social stability.
By employing the number of Chinese studying in Japan to proxy for the effect of exposure to a democratic-cum-nationalist ideology in the context of the 1911 Chinese Revolution, we find that an additional overseas student in a county can significantly account for higher participation in democratic parties (0.234-0.239), greater representation in the provincial assembly (0.328-0.437), and more frequent upheavals (0.238-0.368) in that county. But the effects of ideology are heterogeneous, patterned systematically upon academic specialization and level of educational attainment. In particular, upheavals were distinctly more frequent in counties where the overseas students predominantly majored in arts and social sciences.
Growing evidence from, mostly, laboratory supports the view that women, compared to men, have a greater dislike for competitive environments and sometimes underperform in such settings. This literature points at differences in attitudes towards risk, competition and confidence as possible explanations. We try to understand this more by going to the field. We study store managers who work for a firm with a highly competitive, high powered incentive scheme, with public circulation of weekly league tables. We combine historical data from the firm with a series of lab-in-the-field experiments with the managers. In contrast with existing evidence, we find that women are not put off by the highly competitive nature of the firm’s incentive scheme. Indeed, 60% of the managers are women. Furthermore, in historical data, we find no differences in performance of men and women or in retention. There are also no gender differences in job satisfaction, confidence or risk-aversion. These results show that many women can be attracted to competitive jobs and, once there, perform similarly to men, and have similar attitudes. One obvious explanation is that certain types of women self-select themselves into our firm. We show, however, that this cannot be the full story. We find a striking contrast between on-the-job results and behaviour of the same female managers in the lab, where we engaged them in a maths task (Niederle and Versterlund (2007) design). We find that female managers displayed significantly less confidence and more dislike of competition compared to men in the laboratory task, even though they performed on par with men in this task. Taken together our findings show that competitive incentive schemes in the workplace do not necessarily lead to gender differences in behaviour and attitudes. Further, self-selection is not the full story. The nature of the task matters: while gender differences may be absent in one domain, and persist in others.
Corporate culture is increasingly important for retention and employee motivation. First, using a new survey tool with PayScale.com, I show that culture is strongly correlated with employee engagement and both firm productivity and occupational skills. Second, using plausibly exogenous variation in employees' outside options, I find that the average employee is willing to give up 1.7% of their annual earnings ($1,159/year) for a standard deviation increase in culture and that higher income employees are willing to give up even more. These results suggest that companies use culture to hire and retain talented workers.
Do managers' gender attitudes shape gender-gaps within firms? To answer this question, we build on sociological work showing that a child's gender influences parental attitudes and behavior towards women, and we extend it to the context of human resource management. Using social-security data from Denmark we exploit birth events within manager-establishment spells and show that female employees working in establishments where male managers parent an additional daughter, as opposed to a son, experience an improvement in labor outcomes. In particular, we find that the female earnings ratio increases by 2.5% and the share of female employment increases by 2.3% and that these effects are stronger for the birth of the first daughter (4.4% and 2.9% respectively). These results are driven by a higher propensity to hire women with more education, who work full time, and who are the establishment's top earners. To shed light on the mechanisms behind the link between fathering a daughter and managers' gender attitudes, we further exploit the timing of the estimated results. We find that the effects on female relative earnings and employment kick in right after the birth event, and persist in the following years, consistently with a change in preferences of managers. In addition to a change in preferences, we provide suggestive evidence for a change in managers' beliefs about women as, relying on cross-sectional variation, we find that the positive effects on female earnings and employment are increasing in the age of the first daughter. Finally, as we do not find any effect of fathering a daughter on firms' performance, we conclude that there is no equity-efficiency trade-off in our setting.
Commerce requires trust, but trust is difficult when one group consistently fears expropriation by another. If men have a comparative advantage at violence and there is little rule-of-law, then unequal bargaining power can lead women to segregate into low-return industries and avoid entrepreneurship altogether. In this paper, we present a model of female entrepreneurship and rule of law that predicts that women will only start businesses when they have both formal legal protection and informal bargaining power. The model’s predictions are supported both in cross-national data and with a new census of Zambian manufacturers. In Zambia, female entrepreneurs collaborate less, learn less from fellow entrepreneurs, earn less and segregate into industries with more women, but gender differences are ameliorated when women have access to adjudicating institutions, such as Lusaka’s “Market Chiefs” who are empowered to adjudicate small commercial disputes. We experimentally induce variation in local institutional quality in an adapted trust game, and find that this also reduces the gender gap in trust and economic activity.
Technology is often embodied in expensive and indivisible capital goods, such as production machines. As a result, the small scale of firms in developing countries could hinder investment and productivity. This paper argues that market interactions between small firms substantially attenuate this concern, by allowing them to achieve scale collectively. We design a firm-level survey to measure production processes in three prominent manufacturing sectors in urban Uganda. We document the emergence of an active rental market for machines among small firms, and we build and estimate an equilibrium model of firm behavior to quantify its importance. Our results show that the rental market almost doubles the share of firms using machines, and increases labor productivity by 8%, relative to a counterfactual economy where renting is not possible. We show that the rental market leads to significant gains in our context because it mitigates substantial imperfections in the labor, output, and financial markets.
Does armed conflict reduce trade even in non-combat areas through the destruction of inter-group social capital? We analyze Ukrainian trade transactions before and after the 2014 Russia-Ukraine conflict. In a difference-in-differences framework, we find that Ukrainian firms from districts with fewer ethnic Russians experienced a deeper decline in trade with Russia. This decline is economically significant, persistent, and explained by erosion of trust and the rise of local nationalism. Affected Ukrainian firms suffered a decrease in performance and diverted trade to other countries. Our results suggest that, through social effects, conflict can be economically damaging even away from combat areas.
Markets in developing countries are characterized by long tails of inefficient and poorly run firms and by significant misallocation of assets – two symptoms that the market process that normally reallocates poorly run assets to better managed firms does not function well. This paper provides a detailed study of the Rwanda coffee industry, a context characterized by widespread inefficiencies and that has seen in recent years a process through which large multi-national groups have been integrating backward and acquiring a significant number of mills. Preliminary difference-in-difference results suggest that, controlling for mill and year fixed effects, a mill acquired by a foreign group improves productivity and profitability. Using a uniquely detailed survey panel we document how foreign groups change mills performance. Foreign groups change managers upon acquisition, recruit younger, more educated and higher ability managers and pay these managers a significantly higher salary, even conditional on manager characteristics. These “better” managers explain about half of the better performance associated with foreign ownership. Relative to other managers changes, managers of foreign groups attempt to implement more changes after being in charge of the mill, enjoy more autonomy from owners, but face more resistance from mill’s other constituencies. Domestic-owned groups have also expanded but are, in general, not associated with improvements in performance. We discuss implications for organizational change and for fostering market development in emerging countries.
We place young professionals into established firms to shadow middle managers. Using random assignment into program participation, we find positive average effects on wage employment, but no average effect on the likelihood of self-employment. We match individuals to firms using a deferred-acceptance algorithm, and show how this allows us to identify heterogeneous treatment effects by firm and intern characteristics. We find striking heterogeneity in self-employment effects, and show that some assignment mechanisms can substantially outperform random matching in generating employment and income effects. These results demonstrate the potential for matching algorithms to improve the design of field experiments.
We develop a new accounting framework to decompose cross-country differences in output-per worker into differences in ‘country-embedded factors’ and differences in ‘aggregate firm know-how’. By country-embedded factors we refer to the components of productivity that are internationally immobile and affect all firms in a country, such as institutions, natural amenities, and workers’ quality. In contrast, firm know-how encompasses those components that generate differences across firms within a country, and that can be transferred internationally, such as blue-prints, management practices and intangible capital. Our approach relies on data on the cross-border operations of multinational enterprises (MNEs). It builds on the notion that MNEs can use their know-how around the world, but they must use the factors from the countries where they produce. We find a strong positive correlation between our measure of aggregate firm know-how and external measures of TFP and output per worker across countries. In our sample, differences in aggregate firm know-how account for about 30 percent of the observed cross-country differences in TFP, and for more than 20 percent of the differences in output per-worker.
We quantify the effect of training apprentices on firms and aggregate welfare, exploiting a unique reform to apprenticeship regulation in Colombia. The reform mandates training in firms by setting minimum and maximum apprentice quotas that vary discontinuously in the number of full-time workers. We document strongly heterogeneous firm responses across sectors, revealing differences in the net cost of training. In sectors with high skill requirements, firms decrease their size and bunch just below the regulation thresholds to avoid training apprentices. In contrast, firms in low-skill sectors increase their size to qualify for more apprentices. Guided by these reduced-form findings, we develop a structural model featuring firms with heterogeneous training costs. We find small static effects on aggregate output despite the sizeable labor input responses. Yet, our results indicate potentially large benets to both firms and apprentices when training increases the future supply of productive workers. Finally, we show that counterfactual policies that consider heterogeneity across sectors can deliver similar benefits from training while inducing fewer distortions in the firm size distribution and in the allocation of resources across sectors.
Bargaining over purchase prices with microenterprise owners in Ghana, we show that poorer microentrepreneurs agree to significantly lower prices than wealthier firm owners. This relationship is robust to controlling for a plethora of observables, including owner fixed effects across two rounds of panel data. A computerized bargaining experiment on the same sample, with randomized initial endowment, corroborates our real-bargaining panel findings. A simple extension of classic bargaining theory to include endowments with Constant Relative Risk Aversion (CRRA) preferences yields a similar prediction. Further exploration of this "need-bargaining'' relationship is a key frontier in understanding barriers to the profitability of microenterprises.
A widely held view is that productive firms in poor countries stagnate due to limited access to demand. We hypothesize that overlooked informational barriers to selling goods and services reduce access to demand. To investigate, we gave a randomly chosen subset of Liberian firms vouchers for a seven day-long training program. The program teaches how to compete for input procurement contracts from corporations, governments, and other large buyers that are awarded through a formal tender process. Firms that participate bid on more tenders; win about three times as many tender and non-tender contracts; and win contracts of higher quality. These benefits are concentrated among firms with access to the Internet. We use a simple model to illustrate two potential explanations: additional contracts being publicized online, and Internet access facilitating search and communication with buyers. Both mechanisms appear to be important in Liberia. We show this by exploiting variation in the composition of demand. When online demand—the share of tenders publicized online—is low, trained firms with Internet access win more non-tender contracts, pointing towards the search and communication mechanism. When online demand is high, trained firms with Internet access win both more non-tender contracts and more tenders, suggesting that online market access also matters. The Internet thus appears to dampen traditional information frictions, but—perhaps surprisingly—not informational barriers to firms in poor countries selling goods and services to large buyers. This may make such barriers the limit to many firms’ market in an online world.
In this ongoing project I explore the impact on market participants on changing “product” definition rules on a financial platform in a developing. Specifically, I examine the equilibrium effects on sellers and buyers when a “products” definition is de-conflated. In my context, a trading platform changed interactions between agricultural producers and buyers in the trading of coffee. The arrival of the trading platform by design made buyer-seller transactions anonymous. While an exchange solves the search and contracting frictions, at the same time it gives rise to a new set of issues for commodities whose precise quality and supplier origin matters to buyers. The commoditization (conflation) meant traceability in the supply chain evaporated. These rules of trading lasted for a decade and recently have been changed, I am interested in understanding this reform.
Motivating bureaucrats to exert effort on their job is a central problem for many public sector organizations. In partnership with the health department in Pakistan, we study if bureaucracies can use the organizational mission to incentivize workers and compare the effectiveness of this strategy with a performance-based bonus scheme. We record four main results that shed light on how the public sector should design personnel policies. First, communicating the organizational mission is a viable strategy to motivate workers. Those who receive the mission treatment are five percentage points more likely to perform their duties and those that receive a performance-based bonus improve by nearly 10 percentage points, compared to control. The improvement in performance on extensive margin also leads to better health outcomes for children. Second, mission improves performance along multiple dimensions including teamwork and multiple tasks while bonus only improves it along the dimension linked directly to rewards. Third, providing a bonus in the presence of a mission lowers the effectiveness of bonus. Workers in this group serve 11 extra households, as opposed to 16 extra households in just the bonus group. Finally, the main channel for the mission to motivate workers is through their beliefs about the importance of mission for their work, and workplace norms do not appear to be strong drivers of behavior.
Information asymmetries or community-rating can lead to adverse selection into health insurance. We use a multi-armed RCT that varies insurance premiums to study selection into a health insurance program in India, Rashtriya Swasthya Bima Yojana (RSBY). Limited fiscal capacity in low and middle income countries (LMICs) may necessitate charging premiums, which may exacerbate adverse selection. Moreover, the degree of selection may differ in LMICs due to limited healthcare supply and knowledge, and constraints that interact with selection in a priori ambiguous ways, e.g., liquidity. We find mixed evidence on selection into the program. While those who purchase insurance when premiums are high use insurance more, they are no higher risk than those who purchase at lower prices. To interpret these findings we appeal to a literature in development economics that studies why price sometimes increases utilization of a product. That literature suggests three explanations: selection, price as a signal of quality, and sunk costs. Given this framing, our positive correlation test is not dispositive because it is consistent with all three theories. However, the evidence that enrollment does not vary with risk is inconsistent with selection. We are also able to rule out that price signals quality. Our study employs a two-stage randomization that varies the premium that neighbors pay, holding constant what a household pays. We find that people do not utilize insurance more when their neighbors are charged a higher price. These results suggest that sunk costs effects, rather than adverse selection, explain the effect of price on utilization in our context.
I study bargaining over contract arrangements---contractual flexibility and rental payments---that profoundly affects the ex-post surplus of China's rural land rentals in the context of urban--rural separation. My theory suggests which equations should be estimated to test bargaining over multiple contractual terms. My theoretically justified empirical structure differs from conventional models and helps to explain seemingly inconsistent empirical results reported in the literature. Using transactional data representing the full distribution of rental attributes, I draw two conclusions while also supporting my characterization of the bargaining mechanism. First, compared with renting-in partners, renting-out agents respond more strongly to non-agricultural employment uncertainty induced by urban--rural separation, which increases contractual flexibility. Second, social proximity helps non-stranger entrepreneurs obtain low-flexibility contracts without fully compensating renting-out agents, suggesting that urban--rural separation erects a social barrier to strangers that village trust lowers because social proximity and contractual flexibility are substitutes only in low-trusting environments.
That institutions matter in determining economic performance is widely accepted, and many analysts, like Acemoglu and Robinson (2012), demonstrate this with historical case studies comparing English and Spanish colonies, or Mediaeval Venice. Havrylyshyn and Srzentic (2015) argued good institutions explained the prosperity of tiny Ragusa/Dubrovnik, which became a major rival in maritime trade to mighty Venice 20 times its size. Compiling data for the period 12th-17th c., on performance, institutions like judicial procedures and social programs, they demonstrated that Ragusa had high-quality institutions . This paper extends the analysis asking: why didn’t the larger and older city-states of Dalmatia like Split or Zadar succeed as Ragusa did? Was it because they did not have high-quality institutions ? With some new data on legal and social institutions for other Dalmatian cities, the paper that while Ragusa may have been one of the earliest to put in place good institutions, the others were not that far behind or very different. Thus institutions alone can't explain Ragusa’s greater success; they may have been a necessary condition for success but not sufficient. History suggests an alternative explanation: Venice ruled over most of Dalmatia and restricted economic and trading rights of these cities with inter alia the Ottoman empire, essentially monopolizing this for itself. As Ragusa remained largely sovereign it was able to undertake such trade and to determine its own policies on fiscal, trading, regulatory, institutional and social matters. Its superior performance relative to the others is thus to be attributed to the exogenous historical fact of Venetian Imperialism
A new strand of “sustainable development economics” (SDE) is reframing comparative economics. We summarize SDE’s three-part analytical challenge for each society: the need to “re-couple” progress on incomes with objective and subjective measures of human wellbeing; to “de-couple” progress on incomes from processes of environmental degradation; and to “we-couple” gains in living standards such that no group feels excluded from opportunities for progress. In this multi-dimensional context, economic systems are not judged on a single dimension ranging from “good” to “bad,” but instead relative to the different outcomes they generate across a range of domains. In investigating drivers of outcomes, SDE is agnostic regarding appropriate levels of aggregation and considers societal forces including business, academia, and civil society, in addition to public institutions and policies. Keywords: economic growth, environmental sustainability, inequality, economic systems, institutions, measurement
Thirty years ago, most observers thought that the transition from a planned to a market economy would be a long process. Instead, the changes occurred very quickly and the transition countries do not look all that different than many emerging market economies. In the first part of the paper we discuss whether transition was truly special. In the second part, we look at the characteristics of the transition economies. Our data shows that they have similar economic structures and share many similar economic and political problems as other countries at similar income levels. We found only one area where transition stands out as different. The financial sectors of the transition economies are smaller and less well functioning than those in other countries. Forthcoming in Handbook of Comparative Economics, ed. by Elodie Douarin and Oleh Havrylyshyn, Palgrave. Pre-publication paper available from author pwachtel@stern.nyu.edu
Most enlightenment philosophers argued that the separation between Church and State would prevent capture of resources by one state religion. We formalize and test a theory that addresses a different danger. We demonstrate that a reduction in the separation between Church and State can be corrosive to political institutions, especially the Judiciary. We show that religious leaders use their high legitimacy to gain political office, and become particularly abusive politicians, misusing their political authority to undermine the independence of the Judiciary. We provide a theoretical framework and estimate the structural equations of our theory using data from Pakistan. Our empirical strategy exploits the plausibly exogenous timing of a military coup to provide causal evidence for the key predictions of our theory.
This paper provides causal evidence that Presidential appointment of judges considerably impacts judicial independence, decision quality, and economic development in Pakistan. We find that when the judge selection procedure changed from Presidential appointment to appointment by judge peers, rulings in favor of the government decreased significantly. We show that this reduction reflects an improvement in the quality of judicial decisions and development outcomes. The age structure of judges at the time of the reform and the mandatory retirement age law provide us with an exogenous source of variation in the implementation of the reform. We test for and find evidence against potential threats to identification and alternative explanations for our findings. The analysis of mechanisms reveals that our results are explained by rulings in politically salient cases and by “patronage” judges who hold political office prior to their appointments.
Courts are considered important in the functioning of markets, and yet, there is limited causal evidence showing this. This paper estimates the causal effects of courts’ effectiveness on formal sector firm outcomes, illustrating ex-post contract enforcement in local credit markets as an important channel. To show this, I construct a novel panel dataset on court-level variables from 6 million trial-level data across 195 district courts in India and exploit quasi-random variation in judge vacancy for causal identification. There are three key implications of this paper. First, reducing marginal judge vacancy reduces court backlog by 6%. Second, this stimulates bank lending in local credit markets through improved liquidity from debt recoveries. Third, this affects credit availability, production, and profitability of firms located within the court’s jurisdiction. The results imply an 8:1 benefit to cost ratio of reducing marginal judge vacancy.
In the absence of strong incentive schemes, public service delivery crucially depends on bureaucrat selection. Despite being widely adopted by governments to screen candidates, it is unclear whether civil service examinations can predict job performance. This paper investigates this question by focusing on a highly prestigious and influential set of bureaucrats in Brazil: state judges. We first explore data on judges’ monthly output and cross-court movement to separately identify what share of observed performance is explained by judges and courts. We estimate that judges account for at least 23% of the observed variation in the number of cases disposed. Using a novel data set on examinations, we then show that, within cohorts of candidates taking the same exam, those with higher grades perform better than their lower-ranked peers. Our results suggest that competitive examinations can be an effective way to screen candidates, even among highly qualifiedcontenders.
Much of modern development efforts are channeled through traditional local governance. Yet, despite their importance as politician-bureaucrats, local leaders are rarely paid a living wage. This paper studies the effect of awarding chiefs cultivation rights over village rice land, a stable revenue generating asset, during their term of office. Using a fuzzy spatial regression discontinuity design, I exploit a historical natural experiment in Java where in the nineteenth century a homogeneous region was split, and in one part chiefs were awarded cultivation rights but not in the other. To measure political outcomes, I collect original data from the field tracing the modern electoral history of 931 chiefs in 193 villages. Higher land rents cause positive chief performance and economic development. Chiefs raise more funds and construct more public goods such that areas under their control are richer and more developed even today. I find evidence consistent with historically positive political selection as a key mechanism. Higher rents attracted better quality chiefs in the past. These chiefs were so effective at educational provision that the entire village today remains more educated. As a result, despite higher land rents attracting a higher quality pool of candidates today, neither candidates nor chiefs today are more selected compared to the average villager. Instead, positive development outcomes today are shaped by the selection of chiefs whose interests are aligned away from supra-village elite interests. Overall, my findings provide evidence that paying local leaders from a stable source of local revenue can be good for economic development.
Political capture of public electricity provision may benefit targeted consumers through informal subsidies. However, this causes leakages in utility revenues, inhibiting their ability to reliably supply electricity to the broader consumer base. Using a close-election regression discontinuity design, and a confidential dataset on the universe of geo-coded electricity bills from a large state in India, I show that billed electricity consumption is lower for constituencies of the winning party after an election. However, actual consumption, as measured by satellite nighttime lights, is higher for these regions. I find new evidence to explain this discrepancy -- politicians illicitly subsidize their constituents by systematically allowing the manipulation of electricity bills. To address this corruption through policy, it is important to measure the size of the welfare losses, and compute demand elasticities. I develop a method to estimate elasticities in the presence of data manipulation by leveraging exogenous variation from policy-led price changes and predictive analytics. The net deadweight loss I estimate is large enough to power 3.7 million rural households over an electoral term.
Modern state bureaucracies are designed to be insulated from political interference. Successful insulation implies that politicians' electoral incentives do not affect bureaucrats' corruption. I test this prediction by assembling a unique dataset on corruption, promotions and demotions for more than 4 million Indonesian local civil servants. To identify the effect of reelection incentives, I exploit the existence of term limits and a difference-in-difference strategy. I find that, in districts where politicians can run for reelection, bureaucrats' corruption is 38 percent lower than in districts where they cannot, and that the effect is driven by both top and lower level bureaucrats, which constitutes new evidence of the deep, far-reaching effects of politicians' accountability on local civil servants. Robustness tests, including placebo estimates, the control for politicians' ability and restricting the sample to close elections, support the main findings. I then explore a mechanism where bureaucrats have career concerns and politicians facing reelection manipulate such concerns by increasing the turnover of top bureaucrats. Consistent with this mechanism, I find that reelection incentives increase demotions of top bureaucrats and promotions of administrative bureaucrats.
This article advances the debate over legal origins by using satellite imagery of nighttime lights as a proxy for economic activity and by employing geographic regression discontinuity analysis to control for observable and unobservable factors correlated with location, such as climate and culture. The basic legal structure of most countries was imposed by colonial powers, but Great Britain, France and other European nations did not colonize in a random way. The lack of random assignment means that simple cross-country analysis may lead to erroneous conclusions because of unobservables correlated with legal origin. Regression discontinuity analysis is especially promising for Africa, because many borders were drawn in Europe by diplomats and bureaucrats who had only the haziest knowledge of local conditions, except in coastal areas. As a result, borders split ethnic groups, and areas on either side of the border are similar along observable dimensions and presumably on unobservable ones as well. By comparing African border regions with the same ethnic group on both sides, but which have civil law on one side and common law on the other, or where one side was colonized by one European country (e.g. Britain) and the other side by another (e.g. France or Portugal), one can partially disentangle the influence of law and other colonial policies, controlling for geography, climate, and pre-colonial culture. Analysis suggests that countries with common law legal origin do not perform consistently better than those with civil law.
Commercial certainty requires secure property rights. In advanced economies citizens implicitly assume that the law defines ownership and that they can rely on the state for enforcement. However, we show that formal property rights can be contradictory, fluid, and impossible to enforce – especially in global markets. Legal titles are insecure if there are socially legitimate claims for the restitution, transfer, or restriction of private property rights. We consider such socially legitimate claims as informal property rights: supported by social norms but without basis in domestic law. We study the global art market to examine the relative strength of formal vs informal property rights, the private institutions created to protect informal property rights or resolve conflict between rival claimants, and the responses of policy-makers to shifting social norms. We analyse whether owners of objects with rival claimants choose to resolve or evade ownership disputes based on transaction cost theory.
Current property theory assumes a direct connection between the purposes of property and various facts about the world. Despite a concern about complexity, true complexity in the sense of systems theory – dense interconnection between the elements of a system – is systematically downplayed or ignored. The possibility that the resources, their attributes, and the property law devices built around them show “organized complexity” supplies the missing ingredient that helps provide better static and dynamic accounts of entitlement structure, remedies, and systemic concepts like possession.
Legislation lags behind technology all too often. While trillions of dollars are exchanged in online transactions—safely, cheaply, and instantaneously—workers still must wait two weeks to a month to receive payments from their employers. In the modern economy, workers are effectively lending money to their employers, as they wait for earned wages to be paid. The same worker who taps a credit card to pay for groceries in semi-automated checkout lines depends on dated payroll systems that only transfer payments on a “payday.” Workers, especially those living paycheck-to-paycheck, are hard-pressed to meet their daily needs and turn to expensive, short-term credit products—notably, payday lenders. While the need for credit is a real one, credit providers charge a steep price, often culminating in endless debt spirals. So, why does the payday still exist? This Article studies various explanations—economic, historical, behavioral, and legal. A primary conclusion is that the payday owes its existence to legacy legal architecture. That is, payday is a software problem, not a hardware problem. The hardware—i.e., money and payroll technology—is here. We can pay workers daily; in fact, gig economy workers in developing countries will often be paid more quickly than an American employee for the same work. What holds us back is our legal software: Dated Eisenhower-era legislation that failed to anticipate technological change. Surprisingly, even pro-worker legislation, such as minimum wage laws, inadvertently encourage the practice. By revealing the overlooked and dated legal infrastructure that sustains the payday, the Article suggests a path for legal reform. Daily streams of payment to workers are feasible, practical, and far more efficient than most people realize. A focused reform could effectively bring an end to the puzzling and pernicious practice of having workers lend money to their employers while they wait for their payday.
This article reports the findings of the first systematic overview of the statutory liberalization of trust law worldwide. Using a groundbreaking, manually collected, database of the trust legislation of every jurisdiction which has a trust regime respecting twenty-two trust law variables, I hand coded each jurisdiction’s treatments of each variable since 1925 for their relative liberality. Aggregating all jurisdictions’ scores regarding all variables, I produced a “trust liberality score” for each jurisdiction/year, expressing the extent to which trust law has been liberalized by each jurisdiction by each year. Results show the United States to be the global leader in trust law liberality: seventeen of the twenty jurisdictions which have the most liberal trust laws are American states. Much of the recent global increase in trust law liberality occurred between 1988-2016. Multivariate regression analysis of U.S. data shows that the statutory liberalization of trust law has had no effect on several indicia for the success of service provision to trusts as a commercial enterprise. It is especially clear that reforms seen as pandering, at great social cost, to trust users’ interests in order to create or sustain demand for professional services in the trust context, such as self-settled spendthrift trusts and perpetual trusts, have had no impact on any of these indicia. As an exception to the general finding of a null result, some findings with marginal statistical significance show that law reforms which reduced trustees’ exposure to liability and entrenched their entitlement to remuneration led to a decline in their earnings per trust. Those reforms are also weakly associated with an increase in trust income. It is therefore possible that reforms widely seen as preferring trustees over their clients have resulted in trustees providing a better service at lower cost.
When a contract is breached both US and UK law provide that the non-breaching party should be made whole. I propose a general principle that should guide implementation—the contract is an asset and the problem is one of determining the change in value of that asset at the time of the breach. In the simplest case, the breach of a contract for the sale of a commodity in a thick market, the change in the value of the asset is simply the contract-market differential; the contract-as-asset notion doesn’t add much. It becomes more useful as we move away from that extreme—imperfect substitutes, future deliveries, or long-term contracts. Thus, for example, it makes little sense to talk of the contract-market differential if the buyer repudiated a 20-year take-or-pay contract in the third year. The damage rule should be viewed as the price of the option to terminate. Parties might choose to make that price explicit, perhaps with liquidated damages. In the absence of an explicit exit price, the make-whole rule becomes the default option price. The paper considers the implications of this framing for a number of questions in US and UK contract law: (1) the relation between cover and market damages in the US; (2) the English analog: the concept of the available market; (3) the measurement date following an anticipatory repudiation; (4) the relevance of post-repudiation facts (The Golden Victory problem).
We ask which legal institutions could best create an efficient law to regulate commercial contracts. There are three candidates: courts; private law making bodies -- the ALI; NCCUSL--; specialized bodies of law that regulate specific areas (corporations, family). Judicial rules solve contracting problems in diverse areas as the private agents would have solved then and update as commerce changes. Specialized regulatory rules also respond to agent preferences and update in consequence of industry pressure. Private law making bodies enact comprehensive solutions but lack an updating feature; hence, their solutions become obsolete. We argue that the state's viable choice is the combination: courts and specialized bodies of law. The inability to update is intrinsic to the structure of the private law making bodies.
Law-abiding firms often attempt to conceal their corporate political activity (CPA) in whole or in part, yet the increased concealment of CPA has not been matched by our understanding of the phenomenon. We develop a theoretical framework to analyze the drivers of a firm’s decision to “go dark,” The overarching logic is anchored in the demand-side for nonmarket action and argues that firms will be more likely to conceal their CPA when it increases their expected return from engaging in CPA on an issue. We develop a baseline model of a firm’s decision regarding its CPA modality (i.e., its degree of concealment) on an issue while holding its CPA volume constant, and based upon this model’s parameters, we then develop propositions regarding changes in the level of a firm’s CPA concealment. We argue that theory is particularly important for investigating consequential phenomena that yield scarce data – it is theory which guides data discovery ex ante, helps assess bias ex post, and uncovers key insights that empirical analysis alone cannot generate.
The literature on lobbying and corruption is at an impasse between those studies arguing that U.S. formal corporate lobbying with mandated disclosure is primarily a conduit for corruption and other studies that contend that this type of corporate lobbying is primarily about benign industry information provision to policy makers. Prior work demonstrated how home-country corruption is a robust predictor of corrupt behavior by home country-based groupings of foreign diplomats residing in the United States. In this study, using a rarely utilized data set on U.S. formal lobbying with mandated disclosure at the federal level, we ask whether instrumented home country corruption is a robust predictor of U.S. formal corporate lobbying with mandated disclosure by home country-based groupings of foreign companies operating in the United States. In a counterintuitive finding, we show that U.S. formal lobbying is far more likely to be conducted by companies from the least corrupt home countries. This is true after relying on a proven instrumental variables (IV) approach for identification and after ruling out other alternative explanations based on country wealth, industry portfolio, and innovation. Overall, the results are consistent with the idea that U.S. formal corporate lobbying is relatively more about benign industry information provision to policy makers than about nefarious corruption. Other channels such as bribery still could remain for companies from the most corrupt countries to engage in nefarious corruption in the U.S.
While commentators debate about the likely policy implications of increased disclosure of corporate political activity, disclosure policies vary significantly across firms’ available political tactics and little is known about why firms elect to use darker, versus more transparent, tactics of political influence. We shed light on this by exploring the relationship between a firm's reputation and the tactics it employs to engage in corporate political activity. We argue that political markets are more constrained for less reputable firms because politicians, fearing stigma by association, avoid openly associating with disreputable organizations. This results in less reputable firms having to resort to less traceable forms of CPA, or tactics that do not create an observable tie between the firm and any individual politician or political party. We demonstrate support for this relationship in a longitudinal analysis tracing the CPA of members of the S&P 500 in the decade ending in 2009. We provide additional support for our findings in a supplementary instrumental variables analysis, a difference-in-difference analysis around reputational shocks in the form of consumer boycotts, and an analysis of the disclosure practices adopted by campaigns when reporting contributions from corporate CEOs.
Organizational economists have explicated several mechanisms by which firms can protect proprietary knowledge, including patents, a litigious reputation, non-compete agreements, and equity-based governance in interfirm technology alliances. However, the role of within-firm organization of R&D in facilitating knowledge protection has received little attention. How do patterns of interaction among employees—notably, firm inventors—influence a firm’s ability to prevent rivals from appropriating returns to its innovations? We exploit a new measure of knowledge spillovers, and explore how knowledge protection is related to the structure of the co-invention network within a firm. Our study of patented innovation at several hundred corporations over a 20-year period reveals a positive relationship between the extent to which a firm’s inventors are connected to each other and the strength of that firm’s knowledge protection. We explore several explanations for this finding. We find no evidence that firms with more connected networks produce different kinds of innovations. We do find evidence that more connected inventor networks facilitate knowledge protection by enabling faster, pre-emptive patenting. We speculate that in connected internal networks, more inventors participate (directly or indirectly) in the creation of a given innovation, and are thus better situated to pursue follow-on research along multiple trajectories, as well as to construct more defensive “patent thickets.”
When members of a minority group can monitor and constrain each other, they can leverage their internal social capital to financial gain. When they live within dense networks of personal contacts, they will more often have the information necessary to learn whether potential trade partners have kept their word and to punish those who have not. When members of a minority group lack that social capital, they not only lose these advantageous transactions but become vulnerable to their own self-appointed leaders as well. Lacking a network of close ties, they can neither monitor nor constrain others in the group. This vacuum creates an opening for opportunists to purport to act on behalf of their behalf (perhaps to obtain ethnic subsidies or other group preferences), but actually to generate hostility toward the group and divert rents to themselves. Arrovian statistical discrimination and selective out-migration follow. The opportunists raise the level of dysfunction within the group. Faced with an outside majority that treats minority members by the observed group mean, those minority members with the highest outside options will now leave and abandon the group to the opportunists. Any ethnic subsidies will offset the discrimination in part, of course. The higher the level of subsidies, the fewer the number of minority members who will find it advantageous to leave; the higher the level of subsidies, the slower the pace at which the dysfunctional minority will merge into the mainstream I illustrate these dynamics with examples from the burakumin outcastes in Japan, the Japan-resident Koreans, and the Okinawans.
Available research findings illustrate a contingent association between a team’s network and performance. For a basic task, the ideal network is organized around a central individual. For a complex task, the ideal network is more decentralized and democratic. The contingent network effect has been documented for structured problems, problems with defined solutions sets. When a solution set is ill-defined, the ideal team network is unknown. To solve an unstructured problem, team members must identify and evaluate a diverse set of solutions. A team working in a decentralized network could excel at evaluating solutions, but fail to consider enough solutions, while a team working in a centralized network could discover better solutions, but struggle to evaluate their relative merits. In each case, the team could end up selecting and implementing an inferior solution to the assigned problem. It is unclear which of these suboptimal outcomes is more likely to occur and therefore which team network should be preferred. We analyze the performance of seventy-seven teams working on an unstructured problem. Teams are randomly assigned to different network conditions. Our research findings indicate centralized teams do better than decentralized teams. We also estimate the performance of teams working in networks that combine elements of centralized and decentralized networks. Teams that combine both network features are the best teams.
A fundamental assumption of the “bargaining in the shadow of trial” model is that prosecutors and defendants are focused on maximizing their utility based on the outcomes of the particular case. Unlike private parties, however, it is unclear whether prosecutors care only about the outcome of an individual case or have other considerations as well when negotiating plea bargains. Yet, very little is empirically known about plea bargaining negotiations “in the shadow of the judge.” Using data from Pennsylvania Courts of Common Pleas, the paper develops a novel approach building on the fact that defendants choose not only between a trial and a plea bargain—defendants may also choose to plead guilty (without negotiating a bargain) and leave sentencing to the discretion of the judge. Empirically evaluating the choice between negotiated and non-negotiated guilty pleas allows to isolate the impact of the judge on the outcomes of plea bargains separate from the effect of the expected “trial penalty.”
I use formal models to probe the aphorism that ''hard cases make bad law.'' The analysis recovers the aphorism's core intuition but also enriches and extends it. I show that, among cases posing an extra-doctrinal ''special hardship,'' difficult cases and important cases are more likely to make bad law. But, conditional on making bad law, more-difficult cases make less-bad law. I also model impact litigators who can influence the selection of cases that make law. The litigator improves lawmaking when her influence over case selection is modest--even when her preferred rule is far from the ideal rule--but her effect on lawmaking quality is more nuanced when she has greater selection power. Finally I model a judicial hierarchy with asymmetric information and factfinding discretion. Here, even cases that do not pose a special hardship may make bad law; the effect of difficulty on lawmaking quality is nonmonotonic; and bad laws are Pareto-dominated. The insights enrich our understanding of judicial lawmaking, as illustrated by a variety of applications.
We provide the first empirical evidence on how campaign finance can distort criminal trial court behavior. Using data from Harris County, Texas, we find that elected trial court judges and criminal defense attorneys regularly engage in “pay to play,” where judges appoint attorneys who donate to their campaigns as counsel for indigent defendants. Judges routinely accept such donations, often as apparent “entry fees” from attorneys who have just become eligible for appointments. These judges, in turn, typically award their donors more than double the cases they award to non-donors, with the average donor attorney earning greater than a 27-fold return on her donation. Indeed, we find indigent defense appointments can be surprisingly lucrative, with many donor attorneys earning tens or even hundreds of thousands of dollars across the hundreds of cases assigned to them by their donee judges. This apparent quid pro quo between judges and defense attorneys also appears to directly harm defendants. We find that defense attorneys who donate to a judge are, if anything, less successful than non-donor attorneys in attaining charge reductions, dismissals, and acquittals, or avoiding prison sentences. We contend donor attorneys might underperform simply because they take on so many more cases from their donee judges, and hence spend less time on each matter. We also show how similar campaign finance and attorney assignment rules might enable pay to play in other states, affecting the right to counsel for millions of Americans.
This essay suggests that, in the modern outsourced economy, important types of contractual relationships—among them those related to industrial procurement—are neither fully transactional nor fully relational. Rather, the agreements that govern these relationships incorporate highly detailed written terms that focus not only on what is promised but also on the details of how it is to be achieved and how the suppliers’ actions will be monitored over the life of the agreement. These provisions are not, for the most part, effectively backed by the threat of legal sanctions. Nevertheless they have the potential to add significant value to contracting relationships. Many of these provisions—termed here “managerial provisions”—employ techniques used to organize relationships and increase productivity within firms. Known in the literature as elements of hierarchy, the techniques introduced by managerial provisions are used to provide a roadmap for carrying out the transactors’ work-a-day actions and interactions in ways that are likely to facilitate successful contracting relationships. Interestingly, among the many hierarchical governance mechanisms that managerial provisions import into contracting relationships are eighteen elements of hierarchy that have been closely associated with persistent performance differences across similarly situated enterprises. This raises the intriguing possibility that more fully integrating some or all of these (and other) managerial practices into supply agreements may add as yet unrealized value to these (and other types of) contracting relationships.
Evidence suggests that conflicts between contracting parties are more prone to occur when a party has suffered a significant loss. It is argued that the phenomenon is difficult to understand within conventional contract theory, which assumes full rationality, while behavioral theories based on the concepts of motivated reasoning and reciprocity provide interesting explanations. Thus, losses can trigger motivated, self-serving perceptions and beliefs, which in turn are likely to induce negative reciprocity as well as counter-productive acts aimed at bolstering self-image. These explanations are demonstrated to be well supported by experiments.
Most people think of slum dwellers as living just above subsistence. But that is not often true. People come to cities because of the higher wages there. While those who cannot afford formal housing live in slums, they are also able to save money over time. Until recently, slum dwellers could not put their savings in bank accounts as banks required account holders to have formal addresses and slum dwellers are squatters. Instead, slum dwellers came up with and used alternative investment vehicles. This chapter examines a number of the most common vehicles. One category is rotating credit and savings associations (ROSCA’s). What is intriguing about these is that ROSCA’s are ubiquitous even though they are quite complicated and that males and females participate in different types of ROSCAs. In female member ROSCAs, participants contribute equal amounts at each meeting and then draw straws, with the winner taking the entire kitty. In male member ROSCAs, the participants bid to take a portion of the kitty and the person who bids the lowest portion gets to take that portion, with the rest of the kitty rolled over for the next meeting. We explore how these ROSCAs formed and why males and females have different ROSCA rules. Another category of investment vehicles is homes: people save by building new rooms or floors. We examine why this is the case and how this creates rental markets in slums. It also complicates efforts to regularize slums by giving people low-income homes or land rights. A common dispute is whether benefits should be given to the informal owner of a home or the informal tenant. Our chapter will describe and try to explain how and why these different investment and financing vehicles arose and how new programs such as the government’s new JDY accounts affect economic activity in slums.
What makes housing markets in slums interesting is that people build, buy and sell homes, even though they do not own the land underneath their homes. There is even a vibrant rental market because residents save money by building additional homes and renting them out. Even more surprising is that, although courts will not enforce sales and rental contracts by squatters, slum dwellers use formal legal documents to document their housing transactions. Predictably, prices reflect not just home quality but also local amenities, such as access to roads and distance from toilets. More surprisingly, despite frictions from lack of formal enforceability, housing markets in slums may work as well or better than those outside slums because slums' informality means that inefficient housing regulations (e.g., excessive rent control and zoning) are not enforceable in slums. Our paper documents and tries to explain these facts – and how housing transactions are enforced.
This chapter examines how slums obtain utilities such as water, toilets, sanitation, and electricity even though cities, as a matter of policy, do not provide them. It describes how private entrepreneurs – often called mafia, but not nearly as violent as the US movie version – emerge to provide water taps or tankers for slums without water mains and stolen or resold electricity to slums without service from electric companies. We discuss how some slums take up collections to construct and, importantly, maintain toilets. We also describe how other slums take a different tact and organize into so-called vote banks that trade residents’ votes in return for promises from politicians to make the city provide city services for the slum. We discuss, for example, how the quality of toilets predictably falls the more accessible the slum is because accessibility impose more potential free riders and how organization into vote banks becomes more difficult the more caste heterogeneous the slum is. Ultimately, we show how self-produced services, because they operate at a smaller scale and are not the product of specialization, are costlier than similar services provided by the city to formal communities. The result is a poverty tax that slows social mobility.
Can a career civil servant (bureaucrat) achieve long-term policy congruence via strategic reporting to a political appointee who oversees her agency and sets policy? This paper develops a model that explores when bureaucrats will misreport information relevant to an appointee's short-term decisionmaking in order to influence the appointee's belief formation and, thereby, long-term policy setting. We find that when a bureaucrat's short-term and long-term policy goals do not conflict too greatly, she will prefer to provide a truthful report to the appointee -- who, in turn, is willing to accept the report as truthful (particularly as it pertains to short-term policy responses). When a bureaucrat's long-term and short-term goals are in conflict, however, she has an incentive to engage in deception in which she reports misinformation to her political appointee in order to influence belief formation. Favorable conditions for this deception to take place include divergent policy preferences between the bureaucrat and the appointee, a low likelihood of short-term decisions being necessary, and bureaucratic desire for long-term policy congruence from the appointee.
I develop a model of party formation in which politicians share their political rents with party leaders in exchange for accessing parties’ club goods. Bigger parties provide greater club goods but tax politicians’ rents more upon entry. Therefore, politicians with more assets prefer smaller parties. I estimate my model for Turkey with a dataset of all listed politicians between 1995 and 2014. I find that the right-wing parties accumulate club goods more easily than they produce rents, which leads to ever stronger party control. Counterfactual exercises provide a novel explanation for the differences in party-size distributions across political systems.
We examine whether the exercise of checks and balances can affect nation build-ing by studying how the ruling of the Spanish Constitutional Court on the CatalanConstitution affected Catalan support of secession, which doubled in the 2010-2012 period. Our identification strategy relies on the fact that the ruling occurred amidst a public opinion survey. We nd that the ruling led to a 20% increase in support for Catalan independence from Spain in 2010. We show that the increased support of the secessionist cause cannot be explained by the economic crisis or the political parties' strategies. Although cultural factors are a mediating mechanism, the diminished trust in institutional channels of accountability represents the main mechanism behind our result.
Common property arrangements have long been considered inefficient and short lived, since they encourage high-productivity individuals to leave and shirking among those who stay. In contrast, kibbutzim -- voluntary common property settlements in Israel -- have lasted almost a century. Recently, about 75% of kibbutzim abandoned their equal-sharing rule and paid differential salaries to members based on their contributions. To explain the long persistence of the kibbutzim, as well as the recent privatization of income, a model of public defense is developed, which predicts that defense depends on equal sharing, and that income privatization depends on external threats. Using settlement and Kibbutz level data, it is shown that kibbutzim made the largest contributions to expanding and defending the Jewish territory. When the external threats went away, the kibbutzim in safer areas abandoned equal sharing.
How do we explain the geographic variation in violence against civilians during wars? In this paper, I argue that regions that have records protests before the war experience more violence during future armed conflicts. Protests signal the presence of prewar conflict among civilians. I construct an original data set on civilian killings during the Korean War (1950-1953) and utilize data on prewar peasant protests to test the impact of prewar civilian conflict on wartime civilian killings. I find that a region that has more records of peasant protests before the war experience a significantly higher number of civilian killings. I further find that once the conflict matures, the impact of prewar civilian conflict decline, as armed actors and civilians focus more on events that happened immediately before occupation to sort out and punish defectors.
I formalize interactions between an endogenously rising state and a rival, non-rising state that can accept the rising state’s rise, can go to war before the rise comes to fruition, or can degrade the rising state’s growth through low-level conflict operations that I call “hassling.” The novelty here is that the non-rising state has private information about their hassling capabilities; this implies that the rising state does not know how fast it can rise without invoking the non-rising state to hassle or go to war. I find that when the non-rising state is better able to conduct hassling, it can invoke problematic strategic responses in the rising actor, undermine the non-rising state's ability to use its private information productively, and result in lower utilities for the non-rising state. Empirically, this model provides insight into Saddam Hussein's decision making leading up to the 2003 U.S. invasion, and proxy-wars that occurred during the Cold War.
Studies of the impact of education on political participation find mixed results. We ask whether the effect of education on adult political participation depends on the content of the education that we were exposed to. To study this, we begin by using structural topic models and qualitative text analysis tools to identify changes over time and across states in the content of all the primary school textbooks used in Mexico from 1960 onward. This enables us to identify how the emphasis placed on teaching students about democracy changed both over time and across states. We then combine this information about the timing of textbook reforms with individual-level data on political participation drawn from administrative records, and use difference-in-differences to estimate the effect of primary school textbooks on an individual's propensity to vote, their likelihood to voluntarily monitor elections, and other forms of political participation.
Why do limited property rights institutions persist? We examine continuity and change in Mexico’s ejidal land tenure system, a form of social property in which holders receive limited usufruct rights over individual plots and commons are collectively managed. Many scholars have argued that the ejido has hindered economic and political development through institutionalized land fragmentation and the provision of incomplete property rights. However, though the privatization of ejidal land has been legal since 1992, few ejidos have been partially or fully privatized. In fact, there are more ejidos, more ejidatarios, and more land in social property today than before the 1992 Agrarian Reform. We examine the geographic patterns and historical antecedents of today’s ejido to understand the persistence of this institution.
Can seemingly unimportant factors influence voting decisions by making certain issues salient? We study this question in the context of Argentina 2015 presidential elections by examining how the quality of the infrastructure of the school where citizens were assigned to vote influenced their voting choice. Exploiting the quasi-random assignment of voters to ballot stations located in different public schools in the city of Buenos Aires, we nd that individuals assigned to schools with poorer infrastructure were significantly less likely to vote for Mauricio Macri, the incumbent mayor then running for president. The effect is larger in low-income areas - where fewer people can afford private substitutes to public education - and in places where more households have children in school age. The effect is unlikely to be driven by information scarcity since information on public school infrastructure was readily available to parents before elections. Rather, direct exposure to poor school infrastructure at the time of voting is likely to make public education - and the poor performance of the incumbent - more salient.
This paper analyzes the relationship between political instability and economic growth in Sub-Sahara Africa. Political instability is assumed to impede economic growth , because it induces some amount of uncertainty about future economic policies and resource allocation of public and private goods, which in turn disrupts market activities, productivity and domestic and foreign investment decisions. However, previous research has relied on rather crude indicators of political instability such as coup events or change of the head of state, which are measured at country-year level. Therefore, previous findings likely suffer from problems of endogeneity and reverse causality. To address this problem, we utilize new fine-grained data on political instability, which captures monthly cabinet changes for a sample of 40 Sub-Saharan African countries for the time period 1960 – 2019. Results from fixed-effects regression models indicate a substantial negative effect of cabinet changes on short- and long-term growth rates. To account for problems of endogeneity, we use the natural death of African ministers as exogenous variation encouraging cabinet changes. Results from two-stage least squares regressions confirm the negative effect of cabinet changes on economic growth.
The hybridization of socialist state control with increasingly complex financial markets has generated unusual features in China’s financial regulatory regime. Using the 2015-2016 stock market crisis as a case study, this article draws on the Legal Theory of Finance (LTF) to analyse the state-market interface and crisis governance in China’s stock market. It illustrates the shift of China’s stock market governance away from traditional administrative hierarchies to more plural and hybrid forms of ownership, control and regulatory governance. By examining the policy process, market dynamics and crisis management in the evolution of China’s 2015-2016 stock market crashes, it identifies the endogenous dilemmas of regulatory elasticity and campaign-style enforcement in China’s hybrid regulatory regime, which have amplified policy noises and led to a destabilizing feedback loop between policy-induced market turbulence and market-induced organizational turbulence inside the regulatory bureaucracy.
Most studies that examine subnational variations in public services associate low government performance with a lack of accountability. As distinct from these approaches, I offer a capacity-based explanation in which transaction costs associated with the production process of public services play the key role. Specifically, I argue that transaction costs within bureaucracy decrease with social proximity among bureaucrats –bureaucrats’ informal ties with other bureaucrats in their jurisdiction– because informal ties not only serve communication or socialization purposes but also provide channels for informal information exchange and cooperation. Testing the observable implications of this theory, I find that social proximity, as proxied by geographic proximity, increases bureaucratic efficiency. However, in line with theoretical expectations, geographic proximity is less likely to lead to high bureaucratic efficiency in socially fragmented community structures. Empirically, I show that the effect of geographic proximity is heterogeneous across provinces with different levels of social fragmentation as measured by network indicators. Six months of fieldwork in regions of Turkey with different political and ethnic geographies inform the descriptive inferences underlying the theory and its observable implications. I leverage a geographical regression discontinuity design to test my theory. My empirical tests employ novel administrative data from 30,000 villages and 970 districts in Turkey, geospatial indicators constructed using spatial analysis tools and satellite images, and antenna-level mobile call detail records. This study advances research on public goods provision by studying local public services outside of citizen-centered accountability explanations, instead revealing capacity-driven sources of government performance. By demonstrating that state capacity can vary systematically by the local social context, it also extends the literature on state capacity.
While ethnic local autonomy has been considered as an institution of conflict management, why political leaders decide to introduce it in the first place, and how their presence leads to political stability both remain unclear. Drawing from the case of post-1949 China, I consider the granting of ethnic local autonomy in the context of authoritarian delegation. Drawing from a novel index of elite connectedness and a unique historical dataset of local jurisdictional divisions, I conclude that ethnic local autonomy, as an endeavor of local decentralization, allows the central leader to establish his supremacy over subnational political elites while countering his inner-circle rivals. To explore the scope conditions, I analyze the creation of district-level municipalities after the 1980s, as well as other institutional changes in Imperial and Republican China. I also assemble an original cross-national dataset to study the presence of ethnic local autonomy in post-WWII authoritarian regimes.
Local elites are assumed to resist state attempts at reforming property regimes out of fear of disempowerment. I propose a theory to explain why traditional authorities might support, and comply with, state-backed land tenure systems in contexts of limited administrative capacity. In the absence of restrictions on the customary use of land, I argue that a disruption to forced-labor arrangements encourages elites to promote an exclusionary property order that invalidates workers' claims, reduces mobility, and facilitates the transition to cheap wage labor. I test this theory in Imperial Brazil, where the end of the Atlantic slave trade led southeastern planters to support the Land Law of 1850. Using a novel hand-collected geocoded data set, I show that planters in parishes with more slaves voluntarily shifted their landholdings to freehold tenure to subsidize the arrival of poor immigrant workers. I also show that individual parliamentarians who were slaveowners voted favorably for the Land Law as it denied the possession claims of the rural poor. These findings reveal that property formation in weak states is the result of a co-production effort between local and central interests and not of unilateral state action.
Scholars have long documented how party activists mobilize voters during elections, but politicians use a range of other actors to help get out the vote as well. Despite increasing interest among scholars in non-party based vote mobilization, there is much that we do not know. We explore how politicians use employers and party activists to get voters to the polls and present three findings. First, looking at a range of middle-income countries, we show that workplace mobilization of voters by employers is common, even in countries where parties are relatively strong. Second, using data from Russia, we show that workplace mobilization presents a trade-off. It helps to mobilize workers to vote, but also reduces support among the general public who generally disapproves of this tactic. Third, we demonstrate that media freedom can help reduce the incidence of workplace mobilization by increasing the likelihood of detection by the general public. These results suggest the need for greater attention to employers as political agents during elections and to the normative implications of different voter mobilization strategies.
How do severe shocks, such as an armed conflict, alter a country's economy? We study how the production network of a low-income country is affected by a devastating but localized conflict. We use the Ukrainian railway shipment data for 2013--2016, complemented by the administrative data on firms, to document the propagation of a conflict shock throughout the supply-chain network. First, we document substantial spillover effects of conflict on interfirm trade outside of the conflict areas. Our estimates suggest that the magnitude of the second-order effects of conflict is about a third of the magnitude of the first-order effects. Second, we study the consequences of an exogenous change in the network structure. Firms that, for exogenous reasons, became more central in the production network after the start of the conflict, received a boost to their revenues and profits. However, losers from such changes in the production network structure outweigh the winners. According to our back-of-the-envelope calculations, conflict decreased sales by at least $5.8\%$ outside of violent areas due to the two effects. Finally, we document that if the firms were not allowed to adjust their trading networks, counterfactual losses from the exogenous network shock would have been three times larger than the observed losses.
This paper documents several new facts about the causes of the Soviet Great Famine, 1931–33. First, bad weather was not an important contributor to the famine. Second, excess mortality was much higher for ethnic Ukrainians, the largest minority group, than ethnic Russians, even outside of the Republic of Ukraine. Third, this cannot be explained by differences in weather conditions, historical productivity, or political variables. Fourth, Soviet policies were implemented more zealously for Ukrainians, which resulted in more collectivization of agriculture, lower grain productivity, and higher procurement during the famine for Ukrainians. Both ethnic Ukrainian and non-ethnic Ukrainian Party leaders increased Ukrainian mortality. The results are consistent with the presence of ethnic bias in famine-era Soviet policies.
How do authoritarian states build the legal infrastructure (e.g. property rights, contract enforcement, and the rule of law) necessary to support efficient markets? The market legal infrastructure is often weak due to an “authoritarian’s legal dilemma.” Autocrats avoid creating an independent judiciary strong enough to supply private law (e.g., property rights, contract enforcement), because the same judiciary cannot credibly commit to not strengthening public law (e.g., citizen rights, constitution). We argue that China has devised a novel solution to this dilemma: by partially outsourcing the provision of private law to key private actors. In China’s 500-million-user e-commerce market, online trading platforms such as Taobao have privately supplied strong legal infrastructure to enforce contracts, prevent fraud, and settle disputes. These platforms not only enforce law but also help to reform formal legal institutions through rule experiments. This new route to legal development is politically viable and potentially generalizable to other developing countries.
We build a process model in a new theoretical conceptualization of capitalist systems enhanced by new-institutionalist perspectives. Our rendering ultimately provides managers with a more tractable platform for decision-making than neoclassical models in economics, which largely ignore the role of government in setting the rules of the game. To construct our reconceptualization, we first define precisely what pro-business and pro-market policies underlying market-based systems look like at congruous levels of analysis. On that foundation, we build a process model illustrating pro-market tendencies within the business community, exploring their dynamics at different levels of product/service market maturity. Rounding out our reconceptualization, we recognize non-market actors typically omitted from neoclassical analyses and highlight the critical roles they play as pillars sustaining and supporting capitalist systems over the long run. We conclude with implications for managers and management education—as well as for the future of capitalism. In both the neoclassical paradigm and our enhanced rendering, managers remain self-interested; however, in our rendering astute managers ultimately seek positions that allow them to support market function rather than merely seeking positions that deteriorate market function as firms carve out ever more special privileges.
Can the state leverage the expertise of venture investors while promoting high-value entrepreneurship? We provide evidence that the less extractive power a local government has, the more likely it is to achieve its goal by leveraging the expertise of higher-quality venture capital (VC) and private equity (PE) firms. The concerns about state extraction produce a larger deterrent effect on those potential VC/PE partners that have greater outside market opportunities, hence reducing the quality of the pool of candidate partners available to the state. We examine our hypotheses in the context of Government Guiding Funds (GGF) in China which aim to use public funds as seed money to increase investment in entrepreneurship in high-tech and emerging industries, and to hire VC/PE firms to manage the funds.
How do entrepreneurs leverage institutional intermediaries to acquire financial resources? We tackle this question by examining entrepreneurial strategies to contact investors on a fundraising platform. Using data from a Chinese platform that connects entrepreneurs with investors, we find that the effects of institutional intermediaries depend on how entrepreneurs leverage them. Specifically, we find that stepping-stone strategies are rewarded, whereas status-picking strategies are penalized online. Moreover, we find that stepping-stone strategies are more beneficial in less developed regions, whereas status-picking strategies are less penalized in more developed regions. This paper contributes to prior literature on institutional intermediaries, network tie formation, and platforms. First, while prior work focuses on how institutional intermediaries impact entrepreneurs, we explore how entrepreneurs leverage intermediaries. Second, we contribute to network dynamics by investigating sequential attempts for initial tie formation and discussing initial tie formation through online intermediaries. Finally, while prior work on platforms focuses on the strategy of platform providers, this paper examines the strategy of platform users.
This paper addresses a popular trend in technology companies and startups of offering unlimited vacation as an employee perk. I examine whether unlimited vacation benefits firms, the mechanisms, and the contingencies based on organizational conditions in three empirical settings. Using a combination of text analysis of online reviews, difference-in-differences regression of archival data at a high-tech company, and randomized controlled experiments with online workers, I find that the perk leads to more vacation time, higher subjective productivity, and increased overall labor efficiency. These effects involve multiple mechanisms (sorting, productivity, and engagement) and are contingent on social dynamics, bundled HR practices, and the culture for punishing under-performance.
Generous government-mandated parental leave is generally viewed as an effective policy to support women’s careers around childbirth. But does it help women to reach top positions in the upper pay echelon of their firms? Using longitudinal employer-employee matched data for the entire Norwegian population, we address this question exploiting a series of reforms that expanded paid leave from 30 weeks in 1989 to 52 weeks in 1993. The representation of women in top positions has only moderately increased over time, and career profiles of female top earners within firms are significantly different from those of their male counterparts. The reforms did not affect, and possibly decreased, the probability for women to be at the top over their life cycle. We discuss some implications of this result to put into perspective the design of new family-friendly policy interventions.
We use data across European corporate boards to investigate the effects of quota-induced female representation, under minimal possible identification assumptions. We find that having more women in board causally increases Tobin's Q, despite some negative effects on operating performance and more likely employment downsizings. We interpret this evidence as firms scaling down inefficient operations. Our results highlight that gender quotas are not necessarily a costly way of promoting equality.
In the “future of work”, traditional employment may be substituted by alternative, and short-term, work arrangements. This trend may preclude a firm’s ability to capture value from human capital investments. In this paper, we explore whether a “relational” role of general human capital transfer may alleviate such challenge. We argue that transferring general human capital creates relational capital between firm and worker. This transfer may align supply and demand-side incentives to transfer human capital. Using highly-detailed datasets from a large direct sales company, we find that firm-sponsored general training increases performance and duration of an alternative work arrangement. Further, results from a small-scale field experiment suggest that a relational framing outperforms firm-specific or general framings in terms of incentivizing demand and supply of human capital.
In this paper, we measure whether contractual profit sharing (PS) influences firm innovation and, if yes, how. We disentangle PS effects for different and possibly conflicting interest groups within the firm. We exploit the fact that PS schemes rarely cover the workers all together, but more often than not are used at some layer in the corporate hierarchy and not at others. Based on the analysis of a representative sample of Italian firms, the key contribution of the study is to show that the structure of PS plans matters significantly for innovation. While PS for managers is associated with little or no improvement in innovation activity, PS for non-managers spurs the probability of observing innovation by about 5% to 15%. This may reflect different discount factors of employees at different firm layers. We also document how PS effects, particularly for non-managers, change depending on other firm level variables, such as size, unionization, the span of managerial control and some characteristics of the workforce. Policy implications are discussed.
This paper examines the U.S. government’s intramural research and development efforts over a 40-year period, drawing together multiple human capital, government spending, and patent datasets. The U.S. Federal Government innovates along four dimensions: technological, organizational, regulatory, and policy. After discussing these dimensions, the paper focuses on the inputs to and outputs of government intramural technological innovation. We measure innovative effort and results by accounting for the government scientists and dollars committed to R&D and patents created with government involvement. Overall, we show that intramural innovations, measured by government-assigned patents, are slightly more original and general, but less cited, than patents awarded to private-sector companies and extramural organizations patenting in the same technology classes. The majority of the 200,000 federal government scientists work at the Department of Defense, the Department of Energy, and NASA, and are largely in physical science and engineering occupations; the scientific expertise of other agencies is heavily weighted toward mathematics, social sciences, and data analytics. As these latter disciplines’ innovative outputs are less readily catalogued with patents, measuring total government innovative output with government-assigned patents is likely to over-emphasize innovations in engineering and physical sciences while under-reporting intramural innovations in other disciplines. We discuss the implications of our findings for both public- and private-sector innovation efforts and pose questions for future research.
Technology may improve communication and coordination of resources within firms, but it may also provide information about the firms’ competitive environment. While the existing literature has focused on the former, using large corporations as empirical context, the study of the latter is scant. We fill this gap in the literature by evaluating the impact of a “big data” information technology diffused by a large Spanish bank among its small and medium-size business customers. Using proprietary data on credit card transaction information, we show that technology adoption increases establishment revenue by 9%. The main mechanism behind this result appears to be the information technology prompting establishments to target existing, yet unexploited, business opportunities. Consistent with this mechanism, we find that adopting establishments increase their sales to underserved customer segments. Not only they increase their number of customers, their new customers also come from underrepresented geographic areas and gender-age groups in their customer portfolio prior to adoption. Our evidence also suggests that establishments improve their resource allocation efficiency upon technology adoption.
Innovating firms face a risk of knowledge leakage as their workers can exit employment to join competitors. We study worker mobility as the key mechanism through which firms decide on strategies to protect innovation outputs. Our empirical analysis exploits a 1998 court case decision whereby the California Courts of Appeal ruled that out-of-state non-compete agreements are not enforceable in California. Consequently, non-California firms faced a loophole in the enforcement of non-competes for their previously bound workers. When facing the higher mobility of existing workers, firms strategically increase patent filings as a means of knowledge protection. Further tests support our theoretical account that worker mobility plays a crucial role in patenting decisions. The importance of worker mobility and leakage-by-leaving problem has significant scholarly and managerial implications.
This paper develops a formal model to analyze how organizations should choose between pay secrecy and transparency. We argue that by preventing employees from monitoring each other’s pay, secrecy reduces envious social comparisons relative to transparency. At the same time, secrecy weakens the employees’ ability to jointly sanction the employer for reneging on promised pay, thereby reducing the organization’s accountability. Thus, secrecy is optimal when social comparisons are pervasive, when employees’ effort is verifiable and does not require implicit incentives, or when bilateral employment relationships are strong enough to enforce implicit incentives. Our model suggests that transparency policies often advocated by consultants and policy-makers may have ambiguous effects on employee motivation and organizational performance, and that one-sidedly favorable or unfavorable views of pay secrecy should be replaced by a case-by-case approach.
Recent decades have witnessed a growing focus on two distinct income patterns: persistent pay inequity, particularly a gender pay gap, and growing pay inequality. Pay transparency is widely advanced as a remedy for both. Yet we know little about the systemic influence of this policy on the evolution of pay practices within organizations. To address this void, we assemble a novel data set combining detailed performance, demographic and salary data for approximately 100,000 US academics between 1997 and 2017. We then exploit staggered shocks to wage transparency to explore how this change reshapes pay practices. We find evidence that pay transparency causes significant increases in both the equity and equality of pay, and significant and sizeable reductions in the link between pay and individually-measured performance.
Relational contracts are essential building blocks of the theory of the firm. Yet empirical evidence of the properties of these contracts within firms is limited by the scarcity of records of coworker cooperation. To address this gap, we leverage a unique dataset that tracks transfers between production line managers in Indian ready-made garment factories. We study how managers cope with worker absenteeism on their teams. We first document that worker absenteeism shocks are frequent, often large, weakly correlated across managers, and have substantial negative impacts on team productivity. There are thus gains from sharing workers. We show that managers do indeed respond to shocks by lending and borrowing workers in a manner consistent with relational contracting. But many potentially beneficial transfers are left unrealized, meaning that while relational contracts mitigate some of the adverse impacts of shocks, risk is still imperfectly shared across managers. This is because managers’ primary relationships are with a very small subset of potential partners, who tend to be demographically similar and work on spatially contiguous lines. Counterfactual simulations show that there is potential for large gains to the firm from reducing the barriers to forming additional relationships among managers. Even at the high observed levels of worker absenteeism, resolving as much of the worker misallocation problem as possible through these relationships can meaningfully increase productivity.
What is the effect of job candidates disclosing their salary history on callbacks and salary offers? If these effects differ by a job candidate's gender or the amount they disclose, then disclosure might also impact inequality in the labor market. We implement a field experimental design we call a two-sided audit study, in which recruiters evaluate job applications with randomized characteristics under randomly assigned salary disclosure conditions. We begin by estimating the effects of candidates' salary disclosure on outcomes such as callbacks and salary offers. Then, we combine our estimates to examine the likely effect of recent laws that ban employers from asking candidates for their salary history like those passed in Massachusetts, California, New York City, and Chicago on wage inequality.
Why do some entrepreneurs have better networks of peer relationships than others? We argue that relational skills—the ability to communicate effectively and interact collaboratively with new acquaintances—are an important but overlooked factor in the formation of peer relationships between entrepreneurs. We hypothesize that improving entrepreneurs’ relational skills will affect the relationships they form and their business performance. To test our theory, we conducted a pre-registered field experiment in Togo with 301 entrepreneurs who were randomized into a relational skills training that was embedded in a business training program. We found that entrepreneurs who were exposed to relational skills training formed 50% more relationships with peer entrepreneurs. These relationships exhibited more matching based on managerial skills and were more ethnically diverse. Finally, relational skills training also substantially increased entrepreneurs’ business performance. Our findings highlight how soft skills, such as relational skills, play a central role in entrepreneurs’ ability to overcome social barriers, match with peers, and create value.
This paper studies philanthropy by multinational enterprises (MNEs) during sudden, unexpected, and systemic breakdowns in economic institutions. We suggest that the drivers of this behavior differ from motives explaining philanthropy to chronic conditions under stable institutional contexts. The central argument is that, under institutional disruptions, MNEs aim to restore goods that are essential for market operation, such as infrastructure and labor markets, and the strength of this motive rises in the economic importance of the affected country to the MNE. We constructed the Global Database of Disaster Responses covering every monetary and in-kind donation reported in news media to relief and recovery from firms, governments, multinational agencies, and non-governmental organizations for all disasters that affected the world in the last 30 years. Analyses of donations from 2,000 MNEs headquartered in 63 countries in the aftermath of high-consequence epidemics, natural disasters, and terrorist attacks affecting 125 countries suggest that the economic importance of the country strongly explained donations. Market concentration, public aid, and the country’s regulatory quality moderated this effect. These associations are robust to a matching method, a vector of firm-, country-, and event-specific variables, and alternative motives such as reputation, altruism, media salience, market standing, and poverty-gap avoidance. They offer evidence that company philanthropy in the aftermath of institutional disruptions may deviate from predicted behavior under stability. Particularly, the findings contest the expectation that philanthropy rises in market competition. We find that monopolistic firms are comparatively large donors and may act as a stop-loss mechanism during large country disruptions.
Strategy scholars have investigated how cross-sector collaborations (CSCs) promote value creation generating positive externalities to private, nonprofit, and public domains. CSCs commonly promote these externalities through dissemination of practices beyond the primary targets. However, there has been scant attention to inherent tensions that may emerge when CSC partners would like to promote such dissemination and at the same time measure the performance of collaborative efforts. This tension creates what we refer to as the assessment paradox in the context of CSCs. Arguably, allowing for practices dissemination beyond the target units may severely distort the assessment of causal impact if they also increase the performance of untargeted units serving as control groups. To scrutinize the assessment paradox, we develop a set of hypotheses that are tested in the context of a CSC in the Brazilian educational sector. Our econometric analyses confirm our hypothesized mechanism that the learning-side partner (public managers) may have been able to disseminate knowledge beyond the scope of primary collaboration, even without additional external aid by the transferring-side partner (private/nonprofit). We further investigate heterogeneities related to schools’ traits and social networks moderating the effect of knowledge dissemination.
In this study, we examine the comparative advantage of cooperatives relative to for-profit firms in infrastructure provision. We argue that infrastructure projects generate positive local externalities for the communities in which they are located, and that cooperatives, being able to internalize these benefits, may be willing to provide higher quality infrastructure than for-profits, especially in marginalized communities where the costs of provision are high relative to revenues. We test and find support for this argument in US internet broadband provision from 2014 to 2017, showing that cooperatives are more likely to provide internet in communities where for-profits offer only poor quality service, with these effects being stronger in rural communities, communities with persistent poverty, and communities with high social cohesion.
This study sets out to examine the relative importance of legal and cultural institutions and of personal values in directors’ discretion. We present evidence on the way personal and institutional factors could together guide public company directors in decision-making concerning shareholders and stakeholders. In a sample comprising more than nine hundred directors from over fifty countries of origin, we confirm that directors around the world hold a principled, quasi-ideological stance towards shareholders and stakeholders, called shareholderism. We theorize and find that in addition to personal values, directors’ shareholderism level associates with cultural norms that are consistent with entrepreneurship. Among legal factors, only creditor protection exhibits a negative correlation with shareholderism, while general legal origin and proxies for shareholder and employee protection are unrelated to it.
This paper provides causal evidence on how the definition of employment – whether a worker can legally be designated as an employee or an independent contractor – affects labor market outcomes. We exploit the random assignment of U.S. Circuit Court Judges to specific cases to obtain exogenous variation in employment definitions over time, across states, and across occupations. More “employee” definitions (relative to "contractor" definitions) increase wages for workers in non-manual jobs by 10%, with no effect for workers in manual jobs. We also find evidence that wages increase more for workers in states without right-to-work laws, suggesting there is variation in effect by preexisting legal rules. We also find that more “employee” definitions increases unionization rates by 2 percentage points, again with larger effects in states without right-to-work laws. There is no effect on either aggregate employment or contracting rates, suggesting that the wage gains are not driven by compositional changes in the workforce. These results highlight the importance of legal definitions of employment in the operation of the labor market.
I study how limited information and ex-post evaluation by third parties with the benefit of hindsight affect how regulators approve innovations. In the face of ambiguity over innovation characteristics, such a regulator limits or delays product approval, even when she is not waiting for new information to arrive. When evidence is costly for firms to generate but can be selectively reported, the regulator delegates information acquisition to the firm with the objective of minimizing max-regret. This model can explain observed patterns of correlation between firm costs and benefits of approval, why regulators drag their feet on approval decisions even in the face of strong favorable evidence, and support for regulatory sandboxes even when they do not hasten learning.
This study seeks to better understand the impact that government technology procurement regulations have on social value and national competitiveness. To do this, it examines the impact of a change in France’s technology procurement policy that required government agencies to favor open source software (OSS) over proprietary software in an attempt to reduce costs creating an unexpected demand shock for OSS. Analysis using the rest of the EU as controls via difference-in-differences and synthetic control frameworks shows that this policy change led to an increase of nearly 600,000 OSS contributions per year from France, creating social value by increasing the availability and quality of free and open source software. Estimates indicate this would have cost paid software developers roughly $20 million per year to replicate. However, the open nature of such goods means that any country can reap the benefits of these efforts. Therefore, additional economic outcomes that enhance France’s competitiveness are also considered. The results show that within France, the regulation led to a 0.6% - 5.4% yearly increase in companies that use OSS, a 9% - 18% yearly increase in the number of IT-related startups, a 6.6% - 14% yearly increase in the number of individuals employed in IT related jobs, and a 5% - 16% yearly decrease in software related patents. All of these outcomes help to increase productivity and competitiveness at the national level. In aggregate, these results show that changes in government technology policy that favor OSS can have a positive impact on both global social value and domestic national competitiveness.
One of the foundational assumptions of patent law is that imbuing inventions with intellectual property rights (IPR) is necessary to bring forth innovation. We test this foundational assumption by examining the impact of IPR on commercialization of university research. Using the full set of US public firms who patented and conducted research over the period 1976 to 2007, we find little evidence that university research protected by IPR had higher commercialization relative to university research in the public domain. Indeed, if anything, university research in the public domain appears to have slightly greater commercialization.
Does watching more pirated streaming video mean spending less time watching non-pirated streaming video? This study measures whether, and how much, time spent watching pirated video crowds out time spent on streaming video apps. While prior studies have estimated the impact of piracy on sales revenues, our study measures the impact of piracy on time spent on free and paid streaming apps. We combine big data tools with standard econometric techniques, including a two-stage least squares model, to analyze 5.25 terabytes of online activity data from 19,764 American households and their 468,612 devices from 2016 to 2017. The analysis suggests that every minute spent engaged with pirated video sites crowded out about 3.5 minutes of time spent streaming video. Because pirated video files are generally more compressed than non-pirated video files and because they are frequently downloaded as entire files rather than streamed, as with non-pirate sites like Netflix and Amazon, we conclude that our results exhibit closer to a 1-to-1 crowding out effect of piracy on over-the-top streaming video services.
I use longitudinal data on more than 300,000 Ukrainian firms over the period 1999-2013, including more than 10,000 acquisitions by foreign investors, to study the extent to which tax haven ownership, compared with other sources of FDI, affects employment and firm productivity in the post-acquisition period. Controlling for a rich set of fixed effects and employing propensity score matching, I find that firms acquired by foreign investors experience on average boost employment 8-30 percent, labor productivity 10-16 percent and total factor productivity of 9-11percent relative to firms that stay domestic. The gap is much lower for firms acquired by investors from tax haven countries: using the most conservative specification that controls for firm specific fixed effects and growth trajectories, my results suggest that tax haven acquisitions leave employment unchanged, while productivity improvement is only 4-5 percent. My results suggest much that foreign investment from tax havens has lower effect on firm performance compared to effects of FDI from other foreign countries.