Ronald Coase Institute: 2002 Cambridge Abstracts

2002 Cambridge Workshop: Abstracts

WORKSHOP ON INSTITUTIONAL ANALYSIS
SEPTEMBER 22–27, 2002
CAMBRIDGE, MASSACHUSETTS, USA

ABSTRACTS

Addressing the Squatter Problem in the Philippines:
Insights from the Community Mortgage Program
Marife M. BALLESTEROS
Philippine Institute of Development Studies

To address the growing problem of squatter communities in key urban areas in the Philippines, a community mortgage program (CMP) was conceived to allow organized communities of the landless urban poor to purchase residential land and thereby enjoy security of tenure.The CMP is funded through government budgetary allocation and loans are provided at concessional terms and fixed for a period of 25 years.The land is titled to the community and joint liability is implicitly provided since 100% collection efficiency is required before community title can be unitized (individual titles).

The study aims to examine the following issues: first, what has been the effect of the program in the overall housing problem in the country.As it stands, the program is designed mainly to help squatters purchase land.However, it does not offer much to low-income renters neither to better housing facilities for the poor.The scheme also does not offer much choice to landowners and the issue of whether CMP should take precedence over best use of land arises.

A second issue is: Can collective security or solidarity group dynamics work for housing?Lending to the poor through groups rather than individuals has become a well-established scheme for micro-enterprise activities.This scheme is now becoming popular in providing financial services for the housing needs of the poor.The literature on group lending shows that certain group dynamics (e.g. peer pressure, group solidarity) have had positive effects on repayment.These behaviors have been seen to work well for micro enterprise credit.However, collective security may not work as well in housing specifically in the case of the CMP due to the following: (1) longer term of housing loan; (2) highly heterogeneous households; (3) group size of about a hundred households: (4) problems of "professional squatters" and the "unitization" of land title being tied to community loan tend to aggravate domino effect for non-payment.

The third issue is: How can subsidies be better targeted for this type of program?While there are households that are able to pay for a loan, it is also equally true that there are households that cannot take in any magnitude of loan.If security of tenure for a household is tied on repayment, then it is possible that poor households are "forced out" of the program.

The research is based both on quantitative and qualitative analysis obtained from structured interviews with households in selected communities, in-depth interviews with community officers, administrators of the program, households, NGOs and local government units and data from CMP management group.Initially findings of the study show that 724 squatter communities benefited from the program.However, loan recovery performance is poor and the sustainability of the program is doubtful.Its collection efficiency rate is currently 70% (the highest among government housing programs) but declining over the years. Overdue payments show that 61% of community accounts are at least six months overdue.Moreover, there is a weak correlation between income levels and default rates, which imply that poor repayment is not entirely a problem of resource constraint.Corollary, it is possible that squatting is not necessarily a result of poverty.

Political Credibility and Economic Development: A Case of Azerbaijan
Vugar BAYRAMOV
Azerbaijan State Economic University

Problem
Lack of political credibility, legal guarantees had scared away investors, had hindered economic development and economic growth in Azerbaijan.

Main points
Many political actors have incentives to extol the virtues of economic reform. Some of these incentives arise because reform promises can bring political and material benefits. If such promises draw political support, then they can bring the rewards of controlling government. In Azerbaijan 2 years ago, a government promised the IMF that it would: do structural reforms of the Cabinet of Ministries, abolish social privilege, undertake banking reforms, and privatize some state-owned enterprises. In exchange, the IMF agreed to loan funds to Azerbaijan. The government did not keep its promises concerning privatization, structural reforms, and social privileges. It was a credibility problem; the IMF made loan, but the government did not keep its promises.

Another part of my project is on credibility and economic reforms. In Azerbaijan the credibility criterion is at the heart of debates over the timing of economic reform. In a country embarking on a transition to capitalism, policy credibility is an especially important issue because of the revolutionary nature of the societal transformation.

Questions
I started my research by considering Azerbaijan as a case of a "noncredible" political system and then I considered some important factors. When should we expect Azerbaijan politicians to keep their promises to reform? And more importantly, given the often complex machinations that determine a political leader's or government's ability to keep reform promises, are analysts looking in the right places for the clues that will help them better anticipate which reform plans will succeed?

Objectives
To understand better the importance of political credibility in the development of Azerbaijan economy, and discuss the institutions that shape Azerbaijan corporate governance structure. In Azerbaijan we should consider the following facts which are directly connected with creating political credibility. The first point is that the media are not under the direct control of the government; media organizations compete for attention from the audience of enfranchised persons. There exist competitive, adversarial political parties, where the political parties are sufficiently organized and resourceful to gather and distribute reform-relevant information. However NGOs can play significant role of establishing of credibility.

Expected Results and Conclusions
Discussion of the importance of private sector responses to low political credibility;

Discussion on how to establish the political economy of credibility which is the main step in creating political credibility to develop countries' economy;

Determining the relations of political credibility and economic growth, and discussing the importance of legal guarantees;

Discussion of the problems of stateless societies;

Determining the sources of political credibility.

Trust and Efficiency of Institutions
Matej CEPL
Northeastern University

Fukuyama (1995) presented a powerful concept of the trust in the community. However, the concept was created only for large-scale nation-wide level. I would like to research how well this idea of self-structuring trust in community works on small-scale individual community level.

According to Berrien and Winship (1999), which is the current study of the Boston development in the homicide rate, the crucial element in its decrease (especially in the poorest neighborhoods of Boston--Dorchester, Roxbury, and Mattapan) was ability of community to accept need of change, establishment of institutions inside the community and even more importantly establishment of trust between the community and the official anti-crime agencies (mediated by the Ten-Point Coalition stepping-up as an intermediary entity by both parties).

Long line of research beginning with Banfield (1958) declares that community cannot function unless there is a level of trust in such community allowing individuals to cooperate with one another. However, it is obviously not possible to create a cooperative environment without assistance of the institutions providing backbone to the community. It seems that exactly this interplay between the institutions (in this case police and social services) and local community made the difference which turned the tidal wave of rising homicide rate, when other methods (esp. total use of force trying to ``crack down on crime'') manifestly failed.

The purpose of research is to find whether this theory that the cooperation and trust between police and the community really made the decisive role in the change in community, whether such change was long-term, to describe mechanisms which made the change possible, and how institutions (both official and spontaneous) participated in the change.

The research will use method of the qualitative analysis on the front-end, supported by historical research and quantitative analysis as a background. Therefore I plan to interview both members of the community as well as officials of the police and municipal social services. The historical and quantitative analysis would be used mainly for finding, whether the different development of crime in Boston was not caused by other specific characteristics which cannot be attributed to actions of researched behavior.

Bibliography
Edward C. Banfield. The Moral Basis of a Backward Society.Free Press, 1958.

Jenny Berrien and Christopher Winship. Should we have faith in the churches? The Ten-Point Coalition's effect on Boston's youth violence. Harvard University, July 1999. Available on www.wjh.harvard.edu/soc/faculty/winship/winshipp1.pdf

Francis Fukuyama. Trust: The Social Virtues and the Creation of Prosperity. Free Press, New York, first edition, 1995.

Determinants of Vertical Integration: An Empirical Enquiry on Recent Developments in Communication and Coordination Issues
Isabel DIEZ-VIAL
Universidad Complutense de Madrid and University of California, Berkeley

This research project identifies and assesses the factors that govern vertical integration decisions. Transaction cost theory is combined with more recent contributions from the resource-based and knowledge-based views into an integrative perspective. Seven hypotheses are advanced and tested in a sample of 155 firms using a survey data gathered across the whole span of the Spanish meat industry value chain.

The relevance of the investigation is precisely this integrative perspective, which should help us to explain unexamined issues – for instance, why don't firms always insource non-sequential stages in the production process, as transaction cost economics would assume, or how different interdependences among stages influence on vertical integration, or, finally, do different kinds of uncertainty affect differently on vertical boundaries? On other hand, the previous literature is also expanded on in other novel way. I innovate methodologically, gathering primary data on a firm's first decision of insourcing after entering in the industry. This methodology not only highlights the rationality in the decision-making –It is the first reestructuration in the firm's vertical integration strategy- but enables the selection of a sample containing a variety of transactions along the value added channel and not just one kind of transaction across a number of similar firms, as in most of the literature. The meat industry was selected given its market structure, maturity and especially relevance to economic development in emerging countries.

The results, which were obtained using a Tobit and a ordered Logit models, show that firms vertically integrate with the aim of creating interdependencies –specific assets and shared resources-, introducing technological changes in different stages of the production process and guaranteeing a level of quality or quantity in their supply of raw materials or distribution of their products. On the other hand, firms prefer remain specialized and flexible more under unpredictable large-scale changes in demand. This results were obtained both demand uncertainty individually considered and jointed with the presence of interdependencies. Finally, internal organizational cost did not influence on vertical integration decisions.

Selling the State: Political Privatization in Post-Socialist Countries
Martin DIMITROV
Stanford University

This project asks a simple question: what happened to the bureaucracies of the socialist state? How do they operate in the post-socialist period? Despite its central significance to understanding the political logic of post-socialism, the functioning of the bureaucracies in transition economies has been ignored by political scientists. As I will argue, this lack of analytic focus on government agencies has led scholars to miss a watershed change in the way bureaucracies function in the post-socialist period. In parallel with economic privatization, another process has been unfolding throughout the former Eastern Bloc: the commercialization of bureaucratic office, which I call "political privatization". What this means in practice is that just as the assets of state-owned enterprises were up for redistribution after the end of socialism, the assets of the government bureaucracies could be bought and sold to the highest bidders. In essence, bureaucratic officials treated their public office as a private firm that would bring them personal gains. The bureaucracies could offer two scarce public goods: regulation and its subsequent enforcement. As my research shows, in the post-socialist period both regulation and enforcement could be obtained by private agents for a price. In the absence of meaningful control, the bureaucracies produced too many regulations (thus giving rise to over-regulation), which they then enforced selectively (due to the impossibility to enforce every relevant regulation at the same time). Given the inability of the central government to effectively implement anti-corruption strategies in order to punish transgressing officials, this inefficient system has become institutionalized, and will most likely persist and continue to undermine the ability of the post-socialist state to govern.

This research is based on primary fieldwork in three former socialist countries (China, Russia, and the Czech Republic). I conducted a total of 220 interviews in those countries in the 2000-2002 period, focusing on the transformation of the bureaucracies engaged in the enforcement of intellectual property rights (IPR). My most striking finding was that the political system (democracy or non-democracy) had no impact on the way agencies functioned. Non-democratic China and the democratic Czech Republic and Russia had developed an essentially identical system of institutionalized bureaucratic corruption, where officials exploited their public office for private gains. In effect, all three countries had undergone a process of political privatization producing negative consequences commensurate to those engendered by the misguided economic privatization process.

Why Are There So Many Firms in Egypt?
What'S "Vertical Integration" Got to Do With It?
Amirah EL-HADDAD
University of Maryland

According to the World Business Environment Survey (WBES), 60% of private manufacturing firms in the MENA Region are small enterprises. This proportion is a much higher proportion than any other region (WBES, 2000). Moreover, Guigale and Mobarak (1996) report that small and micro enterprises represent nearly 98% of private firms (even higher than the MENA region's already high proportion), they create three quarters of all private jobs and are estimated to produce 80% of Egypt's private value added. Are these figures an implication of a lack of vertical integration in Egypt? If so, what is special about the Egyptian institutional environment that leads to this lack of integration?

Analysis of the boundaries of the firm has experienced substantial evolution. Neoclassical approaches assumed the costless operation of the price mechanism and largely ignored the role of institutions, explaining firm size by administrative under and overload. Criticizing these theories, Coase (1937), introduced analysis of the determinants of the boundaries of the firm. The make or buy decision or what is termed in the literature as "Vertical Integration" pertains to the fundamental question of the "Boundaries of the Firm". Investigations into vertical integration inspired both alternative as well as complementary theories. A simple classification of these would be The New Institutional Economics (NIE) theories, agency theory and other theories.

According to Williamson (2000) both Transaction Cost Economics (TCE) pioneered by Williamson as well as the Property Rights Theory (PRT) in its modern form initiated by Grossman S., Hart O. and Moore J. fall under the realm of the NIE. Williamson (1979) asserts that the larger the level of asset specificity, the higher the frequency of transaction and the higher the degree of uncertainty the more likely it is to observe vertical integration. Under the special case of the manager and the owner of assets being the same person Grossman and Hart (1986), Hart and Moore (1990) predict that in an environment of ex ante incontractability, the more the specificity of investments, the more the chance for opportunistic behavior and hold up problems the more it is likely to observe vertical integration as a way to overcome such problems.

In a multitask framework Holmstrom and Milgrom (1994) and Holmstrom (1999) adopt an "agency" perspective to the integration decision. The authors predict that the hierarchy is preferred when it is difficult to measure an agent's performance on important tasks and/or when difficult to measure non-selling activities are important. This is so because it is only within the hierarchy that complementary incentive instruments can be used to balance the incentives of the agents.

Other theories stress other aspects. For instance, Birger Wernerfelt (1997) distinguishes between three different governance structures of a buyer seller relationship: the hierarchy, the price list and negotiation as needed. Depending on "communication costs" the author proceeds by setting conditions for the efficiency of each governance structure. Others suggest that country specific characteristics such as family operated firms, standardized production techniques, non-growth conducive macroeconomic environment as well as institutional constraints (e.g. the judicial system, lack of alternative dispute resolution mechanisms…etc.) are constraints to firm size and in turn to vertical integration (Fawzy, 1998).

I am planning to develop a single empirical framework to test competing theories in the context of Egyptian Industry (possibly textiles) and so explain relative degrees of vertical integration between firms (or sectors). This analysis will highlight critical factors in Egypt's institutional environment and thus suggest institutional reforms to improve economic efficiency. My paper will out-line my research strategy, including the model specification, variable definition and survey design.

Measuring entry costs:
Why to do this and What method to use?
Some evidence from Bulgaria
Yordanka GANCHEVA,
Institute for Market Economics, Bulgaria

It is already well known that keeping low the level of entry costs¹ is extremely important for every economy, because the entry costs level shapes the business environment and predetermines the entrepreneurial behavior. There is an assumption that the countries with high entry costs have also high levels of shadow economy and corruption, both prevent economy from growing.

Following this assumption researchers and policy advisors from different countries, including Bulgaria, have started to measure entry costs in order to keep them as low as possible. Special attention has been paid to those entry costs, which are imposed by the governmental institutions. The reason for paying such attention to these costs is entirely practical. We are interested in them, because they are the only one, which could be controlled and minimized by the government.

Obviously it is very important to measure entry costs. The question is: How to do this?

There are two methods for entry cost measurement which are widely used recently.

The first one (more used) is through studying statutory entry procedures and measuring the direct entry costs related to them. However, this method has one small “neglectable” defect – in some countries with weak institutions the results have nothing to do with the reality, because it doesn’t take into account the so called human being factor.

The data from field studies in Bulgaria (representative polls and in-depth interviews with entrepreneurs) show that some times procedures stated in law are quite different from procedures implemented in the real life, which makes real entry costs quite different from those determined by law. It is mainly due to the unclear non-transparent rules, discretionary power of the administration given it by law and because of the human being factor mentioned-above.

On one side, there are public officials, who implement the law in different ways, who are (or not) corrupted and who “accept” different size of bribes. On the other side, there are different entrepreneurs, who have different local knowledge and different personal networks, hence who solve their problems in different ways on different costs. If we take into account all mentioned above we will receive one very complicated picture of human attitudes and institutional arrangements. Therefore, it is not a big surprise that the real entry costs differ from the statutory ones and also that the real entry costs differ substantially across individuals. For example in Bulgaria, a country with over regulated business environment and high level of corruption among public authorities, one entrepreneur could set-up a business in 2 weeks for $150, but for another the same could take at least 12 weeks and $2,500.

It is obvious that this method will face a problem in countries with business environment similar to Bulgarian, because dealing with the statutory procedures on abstract level only cannot give us the whole picture of entry costs for a certain economic activity. However, in order to take proper business decisions, the investors, be they foreign or domestic ones, need information about the real entry costs, not the statutory ones. The same information is needed by the policy and decision-makers in order to introduce proper policies, improving business environment. Therefore, if we want to obtain information closer to reality we have to use another method.

Thus we came to the second method, which we tried to test in Bulgaria. It uses entirely different approach towards entry costs measurement. It follows and investigates all procedures implemented at place taking into account the level of access to information needed for the start-up; the existence of systemic sources of corruption in legislation; the level of corruption of the public authorities; the administrative capacity, etc. The information about the real costs of time and money, related to these procedures, have to be collected through interviewing entrepreneurs.

From practical point of view the second method is much better than first, because it is closer to the reality. However the results from the fieldwork show that it faces several problems too.

One problem is that in a country with strong municipal self-governance, such as Bulgaria, we could not use as a benchmark aggregate data for the whole country, because the entry costs are different in different municipalities. Thus the average amount will be again far from the truth at place and could not be used for initiating any policy changes or developing business strategies. Therefore if we want to take some useful information, we should conduct a poll that is representative not for the country as whole, but for a particular self-regulated administrative district.

Another problem is that in countries with over regulated business environment, such as Bulgaria (with more than 532 license and permits regimes) it is impossible to measure the entry costs for the whole sector, because they are different for different economic activities even within the same sector.

This method also faces the problem of human being factor. We have to be very careful about the information, which we receive from the entrepreneurs. Some times they have forgotten their entry costs, some times they over state their costs in order to look like martyrs and some times they simply lie for fun. In order to exercise some effective control over the data we have to be quite familiar with the entry procedures in the observed region.

Obviously, this method is not the perfect one too and it needs to be improved.

The question is why shall we bother with this at all?

First: Because the market players and policy makers need reliable information about the entry costs in order to take proper business or policy decisions.

Second: Because if we succeed to develop more trustful method we could start to measure entry costs regularly (e.g. every year), which will give us a powerful tool for assessing business environment, the impact of different policies on it, as well as the governmental performance in general.

If there are big differences between the real and the official entry costs, for example, it is a quite obvious indicator that the administration is a) inefficient and/or b) corrupted, which means that in both cases some policy or institutional changes must be initiated.

Notes:
¹Here and after by entry costs we will consider all those costs which the entrepreneur have to pay in order to operate legally and which are imposed by the intuitions, through regulations and their implementation.

Property Rights Interpretation in New Institutional Economics and its Application in the Analysis of Corporate Governance in Russia
Denis KADOCHNIKOV
American University

Major task of my research is to offer an alternative approach to the explanation of the observed situation around corporate control and enforcement of property rights in Russia after the privatization. The now prevalent legalistic approach, although correct in its logic, is limited, because it treats legal institutions as exogenous relative to the dynamics of corporate control and ownership structure.

Greater understanding of these processes is achieved when the focus is shifted towards the identification of more fundamental factors, which affect not only the behavior of corporate insiders and their relationships with other categories of stakeholders, but also the political process of corporate law development and governmental policy regarding (non-) enforcement of property rights.

As the new institutional economics interpretation implies, property right is a mechanism regulating distribution of quasi-rent in the world of incomplete contracts. Consequently, the structure of financing of a corporation is strongly connected to the control distribution and the formal ownership structure. One of the major motives of corporate managers is the protection of their own firm-specific human capital. Thus, one of the keys to understanding the control dynamics and the state of property rights enforcement lies within the analysis of comparative specificity of human capital in corporations.

The examination of financing structure of corporations in Russia proves that the concentration of corporate control in insiders’ hands is matched by similar concentration in their hands of control over financing sources. Seemingly inadequate system of financial intermediation in Russia is often cited as an obstacle for corporate governance development, which again implies its exogenous nature. And yet this system has developed in response to, mainly political, activities of corporate insiders – suppliers of human capital, possessing high degree of specificity, unique to Russian economy.

High specificity of human capital in Russian enterprises, which lied beneath the development of Russia’s “system’ of corporate governance and financing, is to be attributed to the structural disproportions in the economy. It is the analysis of those disproportions and their dynamics that should amend other approaches to the analysis of corporate governance institutions in Russia.

The Drama of the Commons:
How Institutionalised Violence and the Logic of Ethnicity Affect Communal Resource Conflicts in Sri Lanka
Benedikt KORF
Humboldt University of Berlin and Center for Development Research (ZEF), Bonn

Hardin’s notion of the ‘tragedy of the commons’ (Hardin 1968) has inspired decades of discourse among social scientists and economists with regard to whether or not and how common-pool resources could be sustainably managed. Collective action is even more constrained under the conditions of protracted social conflicts (civil wars). Local resource disputes often follow an ethnicised logic of escalation and violence. Grasping the role of institutional arrangements is essential to derive sensible intervention strategies in such protracted social conflicts, be it during or after the actual civil war. The basic point is to understand the dynamics which have distorted the institutions in a society causing some of its actors using violent means in the social, economic and political bargaining process.

Game theorists have provided a strong case to outline the strategic nature of collective resource management and for predicting the outcome of institutional change. However, some scholars have criticised game theory for (over-) emphasising outcomes (pay-offs) rather than the enabling process. I utilise a conceptual framework based on drama theory which builds upon game theory, but analyses the process of confrontations in conflicts over resources. Drama theory rests upon the idea of a ‘soft’ game, which is also called a ‘frame’. This is a game (in the sense of game theory) that is not fixed, but is transformed through the emotions of characters (actors in the game) as they face dilemmas and paradoxes of rationality. Six dilemmas, namely threat, deterrence, inducement, cooperation, trust and positioning lead the characters of a drama to reframe their perception of the environment and, consequently, to change their positions, interests, and the rules of the game.

Using drama theoretical dilemmas, I analyse the case of a local conflict over irrigation land and water in an extreme actors’ constellation: the civil war of Sri Lanka. I employ analytic narratives to construct the confrontation underlying this resource dispute in order to outline the role of violence, conflict entrepreneurs, ideologies and ethnicity in determining the characters’ bargaining power, their changing perceptions and their reframing of positions and interests.

Corporate Social Responsibility as a Value Creation Strategy:
An Institutional Approach
Claudio Antonio Pinheiro MACHADO FILHO
University of São Paulo, Brazil

The issue of Corporate Social Responsibility is subject of growing debate in the academic environment. It is widely accepted that business has an ethical dimension, besides the economic and legal dimensions. But there is no consensus about the nature of the ethical dimension and to whom they are owed.

A group of scholars support the “stockholder view”: the idea is that the only social responsibility of business managers is to increase profits of the company’s owners, respecting the rules, without fraud or deception. Other group support the “stakeholder view”: business managers have duties to several groups, all of those affected by the firm’s decisions, including clients, suppliers, employees, community and so on.

This research will evaluate these competing views under the framework of institutions where the business activity is played. The point is that the institutional set is the main motivational factor inducting the firm’s behavior regarding ethical and social responsibility issues. The changes in the global institutional environment, both formal and informal, as a consequence of the growing market integration are the driving forces in the behavior changes of firms worldwide and specifically within the Brazilian context.

This study will focus on the links between institutional environment, business ethics, reputation and corporate social responsibility of five Brazilian companies from the food, pulp and paper agribusiness fields (Nestlé, Sadia, Perdigão, Jari Cellulose and Orsa group). All of them have recently launched social responsibility programs. The study discusses the main incentives for the companies to engage in such programs.

Although with different motivations, the owners and executives of companies have the perception of positive returns of social responsibility actions to the corporate image. They report a growing concern with such issue, which is becoming part of their corporate strategic planning models.

The main hypothesis of this study is that the institutional framework, derived from technological changes specifically in communications, new social and environmental regulations and consumer behavior changes are raising the ethical concerns of companies, inducing them to develop social responsibility actions as a strategy to gain or at least maintain their reputation capital.

Transaction Governance and Contractual Relations
in a Transition Economy
Olga N. NASHCHEKINA
National Technical University “Kharkov Polytechnic Institute”, Ukraine

The goal
The research project is aimed at showing how characteristics of the institutional environment in a transition economy influence the ways of contracting between economic agents, with a special reference to Ukraine.

Motivation
The better we understand the sources of transaction costs and the role of institutions in reducing (or raising) transaction costs for different types of transactions, the better policies we can offer for developing new institutions or improving the existing ones. This topic is particularly relevant for the Ukrainian transition economy characterized by incoherent and unstable institutional matrix, which does not promote the cooperation between the economic agents and, consequently economic growth.

Methodology
The empirical data are obtained through surveys of Ukrainian small businesses. The data lend themselves for descriptive rather than causal research. I do not establish explicit correlations between the institutional factors and the resulting characteristics of transaction governance structures. However, I discuss the implications of the institutional environment for contractual relations in the Ukrainian small business qualitatively in the framework of the transaction cost economics approach.

Issues addressed
1. The peculiarities of the Ukrainian institutional environment

2. The bending of the formal rules as a way of adjustment to the hostile institutional environment

3. The specificity of contractual relations in the Ukrainian small business

3.1. The approaches to the selection of business partners

3.2. The role of informal networks

3.3. The causes of contract terms violations

3.4. Ex ante safeguards and ex post responses to breaches of contract terms

3.5. The meaning of reputation

3.6. The interplay between formal and informal arrangements and their relative importance in contractual agreements.

3.7. The role of different types of trust in business relations

Main findings
1. The deficiencies of the Ukrainian institutional environment are discussed.

2. A model treating interactions between entrepreneurs and the state as the institutional matrix provider as contractual relations is proposed.

3. It is shown that business relations are built and maintained mainly within informal networks. Frequent changes in the formal rules necessitate frequent ex post contract term adjustments and thus call for relational contracting modes even for simple, short-term transactions. Private ordering is normally preferred to litigation. Personal trust plays a much greater role in business relations than institution-based trust. More stress is placed on trust in the intentions than trust in the competence of a business partner.

Institutional Framework and Entrepreneurial Endeavour:
The Case of Small Enterprises in Tanzania
Estomih J. NKYA
Mzumbe University, Tanzania

Research problem and objectives
Wide-ranging policy reforms have been undertaken in Tanzania since 1986 as a response to the economic crisis of the first half of the 1980s. The continuing withdrawal of the state from direct productive activities is raising an interesting concern as to how best to promote private entrepreneurial activities. Despite a significant increases in the activities and number of small enterprises, less than optimal performance is observed. It is interesting to understand how the changing institutional framework is affecting small entrepreneurs.

The purpose of this study is to find out how institutional arrangements account for success and constraints in entrepreneurial endeavours in the Tanzanian small business sector. Why and how do potential and existing small-scale entrepreneurs respond to changes in institutional arrangements? The ultimate research objective is to understand the nature and characteristics of institutions that create a business environment conducive to growth.

Analytical framework and methodology
After a review of institutional economics and entrepreneurship literature, an analytical framework was developed. The framework is based on the claim that the observed intensification of entrepreneurial activities in the Tanzania’s small business sector during the market-oriented policy reforms has been influenced by the changing institutional framework, which renders the small business environment more conducive to successful start-up and performance of small business enterprises. Pre-reform institutional framework was associated with high transaction costs and disincentives to formal small enterprises.

The in-depth and dense nature of the research questions (how and why) necessitated the use of qualitative research methodology in which descriptive multiple case study design is adopted to achieve research objectives. Cross-case analysis and pattern-matching mode of analysis are employed to extract findings.

Progress
Fifteen cases of small enterprises have been studied so far and the pattern of evidence from the cases is matched with propositions developed from the theoretical framework. Preliminary indication is that, entrepreneurial endeavour in small enterprises in Tanzania is taking place in a context of a mismatch between a slowly changing institutional framework and fast moving economic policy reforms. This mismatch is constraining entrepreneurial endeavour and increasing transaction costs.

The institutions of the market of development-knowledge: is it helping development?
Gabriel ORTIZ de ZEVALLOS
APOYO Institute

Development theory has evolved over the past decades, questioning and renovating approaches in the process of defining which issues are most critical for development—growth and investment, trade, the role of the State and private markets, human capital, institutions, social capital, corruption, etc. Mostly in the academic arena of the developed world, and financed by the international cooperation institutions, different models and approaches are continuously confronted until one prevails, in a process of knowledge building that has had its flaws, but which can still be described as an incremental process of discovery and better understanding about the determinants of development and underdevelopment. With all its limitations, development knowledge¹ has advanced and served as a useful process of trial and error to learn about the compelling question of what policies are most appropriate to foster development and reduce poverty.

A key question, however, is: “Where does this knowledge-building process take place and what actors define its priorities and obtain its benefits? It seems clear that the developed world academia and international cooperation agencies may be the main scenario of the process, which is probably not the best alternative to foster development.

More importantly, the “rules of the game” of this “development-knowledge” market in the developed world may not be helping to bring information and knowledge where it really can make a difference—in the minds of the politicians, policy-makers and civil societies of the developing world. If most of development knowledge is being accumulated in developed world’s academia instead of the policy arenas of the developing world, development knowledge is not being very useful. If DC and other cities of the developed world are the most active and influential centers for development knowledge, it might be that knowledge is being developed under the rules of the developed world’s academia, introducing incentives which are completely different from those that would be desirable to foster development in LDCs.

The developed world academia on any subject, including development, has a relatively greater interest in allocating research resources to frontier issues, in order to advance knowledge, than might be useful for policy debates in LDC, which may be stuck on issues relatively less attractive from an academic perspective. The allocation of research resources and the priorities of research might differ from what would be optimal to foster development.

Dissemination of results might also follow the general rules of the academic world in the developed world—specialized journals, seminars and conferences, which might be efficient ways of communicating and debating results for the development specialists in the developed world, but which are completely ineffective in reaching policy makers in the developing world, who are the most relevant audience.

In both cases, perverse incentives might be put in place, making it difficult to arrive at a solution. The people who decide how to prioritize, conduct and disseminate research on development issues form part of the same development-community of the developed world. Therefore, they face the career incentives of that market—to publish or perish, to prefer frontier issues over politically relevant issues, etc. Their decisions might probably correspond to the best option to advance in their careers in this market, which is different from the option to improve informed discussion and decision-making about development in the countries they ought to serve.

The research project, currently at a preliminary stage, will focus its attention on describing how the development market operates in the developed world, describing the rules of the game and the incentives that it implies for different agents in terms of the allocation, conduct and dissemination of research and consulting studies on development issues. The key question is to analyze whether those rules and incentives are favorable or even compatible with the process of knowledge building about better policies in the policy arenas of the developing world, where it is most needed.

Examples of the questions to be raised are:

How much money is allocated to research and consulting studies? Who decides what issues should be studied and analyzed? Do the developing countries’ political actors and civil society representatives have a way of influencing the selection of issues to be studied? On what criteria are these decisions based?

What are the career incentives for development experts in the developed world? What are the specific career incentives for the people who most frequently decide how to allocate resources for research and consultancy studies?

Who conducts the studies? How many studies are conducted in the developing world, as opposed to international experts working in the developed world? When a study is made, independently of who conducts it, what is its main audience?

What is the product? Who reads it or knows about it? Is it public? How is it published? How long does it take for a paper to be published?

What information and studies are available on the intranet that is not available on the Internet? Who is receiving the information on the studies conducted? Is there a system of knowing how effective dissemination activities have been?

How much money is allocated to frontier versus politically relevant issues? Do political actors and civil society organizations from developing countries know about the studies conducted? How often?

Which actors in the developing world follow the information and knowledge that is available in the developed world development community? Why do they follow it? What do they do with it? What are the career incentives? Does it reach the policy decision makers? Does it contribute to inform the public?

Are there any examples of studies conducted in the developed world that have been influential in policy decision making? Through what channels?

A more specific focus and methodology are still under discussion. The study will be conducted by researchers who currently operate in the developing world and in the developed world market for development policy issues. It will employ interviews with and surveys of multilateral and bilateral cooperation agencies, development think tanks in the developed and developing world, and politicians from the developing world.

Notes:
¹Knowledge should not be misunderstood for certainty. By knowledge we refer to the actual state of understanding of the nature of a specific issue, in this case, development. Knowledge may—usually does—include uncertainty and conflicting visions about different topics.

Contract Enforcement: Relational Contracts or Courts in Cross-Border Trade: A Survey for Bulgaria and Macedonia
Petya PLATIKANOVA
Institute for Market Economics, Bulgaria

For markets to function there must be some means of assuring promises will be kept. As Arrow notes, “Virtually every commercial transaction has within itself an element of trust,certainly any transaction conducted over a period of time.” Trust might rests on a mix of formal and informal institutions. Formal institutions can lower entry barriers and costs for enforcing relational contracts. As studied empirically, a disadvantage of the relational contract is that they might cause firms to stick with established relationship rather than working with new, untried partners, thereby creating barriers to entry. Relational contracts have an advantage over the courts in that bills may be paid after delivery which is a trade credit secured with trust between trade partners.

The transition countries are largely without a recent history of private property rights or government enforcement of commercial contracts. The governments in transitional countries do not have the experience and tradition of providing government services. Debates on entry costs (e.g. licenses and permit requirements) are not only in the international recommendations and country strategies but also in political agendas of the former and incumbent governments; however, even now public officials introduce new regulatory regimes without a proper legal and financial justification and intervene on the market regularly. There are many efforts to reform court systems and improve regulatory procedures which are set in commercial rules but developing countries are still far from securing private transactions on the market.

Not only formal institutions but also business networks in transition countries cannot lower costs of securing private transactions on the market. The findings of different studies on services provided by business networks are that neither business nor government networks efficiently make partners or enforce contacts. Firms claim that these networks have no real data and statistics on provisional partners, range of products and prices. These are the findings we made in a survey on cross-border cooperation and contract enforcement in trade relations between private firms in Bulgaria and Romania two years ago. Firms do not regularly rely on business network services. The company files in the Bulgarian Chamber of Commerce and Industry are updated only when member-companies request services from the association, i.e. ‘forced’ to do that.

There is a couple interesting findings on the contract enforcement in cross border trade relations on the Balkans. First, Balkan countries have similar technology and range of products and in these countries there are industries, e.g. chemical and pharmaceutical, which are heavily rooted in CMEA division of labor. Trade and cooperation between former CMEA country-members is often due to non-market factors, e.g. when one of the production facilities in either country is out of operation. Thus, when the Romanian chemical sector was being privatized and local production lines were temporarily terminated; the Bulgarian chemical plant supplied Romania with products. This will be probably the case with Macedonia.

Second, although relational contracts on the Balkans are common, there is a high political risk which increases costs of contract enforcement. Different government instruments are applied regularly to protect domestic producers from cheaper import. Political instruments not only create a “green house” effect on import companies but also increase transaction costs on the market in an unpredictable business environment.

The idea of the study I started with in March this year is to evaluate current contract enforcement conditions in Bulgaria and Macedonia. The research is as a follow-up of a survey on cross-border cooperation already mentioned (for Romania). It includes not only an overview and comparisons of the legal conditions for securing market transactions in both countries (e.g. public registers and arbitrary courts rules), but also a firm survey, interviews with firms, which have partners cross the border (the interviews will be probably conducted in the summer). The findings will be on different practices in keeping trade promises, the history of the trade relations and various sources of information about the partners.

Institutional Influences on Incomplete Financial Contracting and the Relevance of Accounting Information
Asheq R. RAHMAN
Nanyang Technological University, Singapore

Incomplete financial contracting arises from incomplete knowledge. The greater is the incompleteness of financial contracts the larger could be the overall transaction costs of the contracting parties. The transaction costs would involve cost of procuring information, contract renegotiation costs or outright loss due to adverse selection or moral hazards of managerial indiscretion. Accounting disclosures reduce incomplete knowledge and, thereby, reduce transaction costs. However, relevance of accounting information in capital markets is dependent on the institutional setting of accounting. Research suggests that if the quality of the accounting institutional setting is perceived to be low the relevance of accounting information is adversely affected, and that may lead to additional transaction costs for financial contract governance.

The literature in law and finance suggests that legal and financial institutional arrangements also contribute to the incompleteness of finance contracts. Legal and financial institutional settings vary between countries in terms of laws and practices that provide completeness to financial contracts. This would be due to the variation in the laws for writing and enforcing contracts and efficiency of financial institutions, such as stock exchanges, for efficient execution of financial contracts.

The perception of incompleteness of contracts that is created by the nature of law and finance institutions may distort the relevance of accounting information in capital markets. Without adequate institutional safeguards all contractual devices including accounting information will have low relevance to contracting parties. Law and finance literature documents many different institutional elements that could contribute to the perception of completeness of financial contracts. I intend to identify a measure of perceived transaction costs, e.g., country cost of equity, covariance of country-market indices with US-indices or a measure of country risk, that best reflects the effectiveness of legal and financial institutions in making financial contracts less risky.

I hypothesize that the relevance of accounting information is positively associated with the reduction in transaction costs arising from the effectiveness of legal and financial institutions of capital markets. The implication of this study for policymakers would be to focus on legal and financial institutional developments that reduce risks of financial contracting in developing capital markets.

Norms in the Economic Evolution:
Old Believers in the Russian Nineteenth-century Textile Industry
Danila RASKOV
St. Petersburg State University

In many cultures closed, heterodox religious communities (such as Quakers, Mormons, Mennonites) made significant contributions to early capital accumulation and the introduction of commercial enterprises. Historians have observed this process in Russia with regard to the role of the Old Believers¹ in Russia’s nineteenth-century textile industry. How can this phenomenon be quantified and explained?

First, I analyze the pertinent evidence (including business case histories, government statistics, merchant guild materials, and archival sources) in order to obtain a clear picture of Old Believer’s economic activity and to demonstrate the rise and fall of their participation (especially in textile industry) in XIX century. Second, I focus on the evolutionary explanation of this process in the perspective of New Institutional Economics. Two parameters are most important in my main hypothesis. The comparative advantages of Old Believers that were rooted in their cultural and social norms (eschatological beliefs, special attitude to rites and letter, stateless culture that made them different from official Orthodox followers; also asceticism, hard work, thriftiness, literacy, strong community ties). I regard these comparative advantages as the stable parameter. Then I examine changes in external environment that faced Old Believers – political and technological. Liberalization of internal policy and tariff protection in foreign trade helped for Old Believers to realize their comparative advantages during 1820-1860, but government intervention starting from 1880 in the development of railroads, metallurgy, banking system shadowed their position in the economy. But even greater gain and loss of comparative advantage was occurred in external technological change. While in the first half of XIX century textile industry required small amount of capitals and developed gradually, in the second half of XIX century it required certain sets of big investments in production facilities, distribution network, management organization etc.

This main hypothesis (comparative advantage – technological change) is accompanied by so called secularization hypothesis that regards the correlation of wealth with the decline of religiosity among Old Believers. The validity and spheres of applicability of these two hypotheses are discussed.

This case illustrates the crucial importance of norms and rationality in the process of the economic evolution, which is characterised by heredity and change. Given cultural and social norms may be rationalised in economic terms at certain period of time but, on the other hand, they sometimes create obstacles for other periods of time – when circumstances have changed. Therefore, the same social and cultural norms can lead to different economic results in various external technological and political conditions.

Notes:
¹Old Believers are the descendants of Russian clergymen and laymen who refused to accept changes in the church missal and ritual in 1654-1667. The Russian church schism of the seventeenth century was powerful opposition movement which united approximately 5-10 percent of the population.

The Relations Between Informal and Formal Sectors and Development
Pablo ROSSELL
Centro de Estudios para el Desarrollo Laboral y Agrario, Bolivia

In this study, we aim to understand the nature of the relationships between formal and informal sectors in Bolivia. Since 1985, the structural reforms have affected the labor market in Bolivia: nowadays, more than 65% of the labor force is in the informal sector {Arze, 2000 #3}. Several studies asserting that formal and informal sectors perform separately, do not consider the empirical evidence of multiple linkages between them. But, as Portes and many other authors have shown, {Portes, 1995 #35; Pérez, 2000 #64; Rossell, 2001 #61} formal and informal sector are actually related by subcontraction linkages, home workers manufacturing for big corporations, etc.

However, it is still unclear how these linkages are set, and the role of the social capital in the formation of the labor market’s informal sector is still unknown. Furthermore, is seems necessary to clarify if the state efforts in order to legalize the assets of the poor —as recommended by the World Bank {, 2000 #113} and De Soto {De Soto, 2001 #111}— are enough to include the informal sector to the development process.

The questions that guide this study are:

Which are the fields in which formal and informal sectors are related, and which are, specifically, the forms of these relations in Bolivia?

What is the role of the social capital in the formation of the informal labor market?

How should the state deal with informality in order to achieve economic development?

The main objective of this research is to give a comprehensive framework to understand informality, and its relationship with the development process.

Brand Name as an Asset and a Contract: An Empirical Analysis
From Franchising
Claude Ménard, Paulo F. Azevedo and Vivian L.S. SILVA
Centre ATOM, University of Paris (Pantheon-Sorbonne) and Federal University of São Carlos (UFSCar), SP, Brazil

Traditionally brand name is view as a way of transmitting information: it exists because information is costly and/or because there are uncertainties about products or services. As a consequence, the main goal of a brand name is to establish a signal, as a contractual relationship, between sellers and buyers (Barzel (1982), Demsetz (1979), Nelson (1970), and Lafontaine (2001)).¹ Although in accordance with this approach, Ménard and Valceschini (2000) state that this is only part of the story, once there are others dimensions that emerged from the recent developments in New Institutional Economics. Indeed, “brand names are not solely designed to send more or less adequate signals, they are primarily designed to implement a relationship, and this relationship requires specific assets, (… which) can be more or less redeployable and (… so,) leading to ‘brand name specificity asset’ in the Williamson’s terminology (Ménard and Valceschini, 2000: 8).² In their analysis, Ménard and Valceschini (2000) suggested brand name should be viewed ‘as an asset and as a contract’ simultaneously.

This paper aims to address this discussion specifically to the analysis of franchised brand name. On one hand, ‘as a contract’ the main role of franchised brand name is its capacity in transmits information in a regular way, independent of time and localization of consumption. As a key-element of business format franchising, this capacity will stimulate and maintain consumption and, as a consequence, the interest of potential franchisees. On the other hand, ‘as an asset’, both franchisor and franchisee should realize substantial investments to development and support of brand name, which can be more or less redeployable, and so specific for one or both of them. For instance, while franchisor should invest in activities of research and development of new products and business format, the franchisee should invest in different taxes (as franchisee fee, royalty and publicity rate), equipments, building, transport, and know-how.

This analysis contributes to the discussion about brand name asset specificity of franchise, as suggested by Azevedo et al. (2002), Azevedo and Silva (2002, 2001), Bai and Tao (2000), Minkler and Park (1994), Wimmer and Garen (1997).³ If as ‘a contract’ franchised brand name received enough attention from the literature, ‘as an asset’ is still far from it.

As a first step, we intend to discuss the main findings of standard economic approach, and how the New Institutional Economics can help understanding the problematic concerned with brand name as ‘an asset and as a contract’. A second step will be to focus on franchised brand name, considering how the particularities of franchising make this discussion more complex. About this, as this organizational form facilitates the employment of the same brand name in different institutional environments, we intend to realize an empirical analysis in different countries – France and Brazil – in order to compare if particularities of local legal system, and institutional environment influence the level of franchisor and/or franchisee specific investments.

Notes:
We gratefully acknowledge FAPESP, CAPES, and CNRS for financial support. Also, our sincere acknowledge to ATOM Center (University of Paris 1 / Pantheon-Sorbonne) and Ronald Coase Institute for providing a fruitful environment for the development of this research. The usual caveat applies.

¹Barzel, Y., 1982. Measurement cost and the organization of markets. Journal of Law and Economics, 25: 27-48.

Demsetz, H., 1979. Accounting for advertising as a barrier to entry. Journal of Business.

Lafontaine, F., 2001. Retail pricing, organizational form, and new rule of reason approach to maximum resale prices. Mimeo, University of Michigan Business School.

Nelson, P., 1970. Information and consumer behavior. Journal of Political Economy, 78: 311-329.

²Ménard, C. and E. Valceschini, 2000. The creation, usage and enforcement of trademarks. Bureau of Economic Analysis.

³Azevedo, P.F., A.G. Silva and V.L.S. Silva, 2002. Contractual mix in Brazilian food franchising, to be presented at the 6^th Conference of the International Society for New Institutional Economics, MIT, Cambridge, MA (www.isnie.org).

Azevedo, P. F. and V.L.S. Silva, 2002. Food franchising and backward coordination: an empirical analysis of Brazilian firms. Journal on Chain and Network Science, forthcoming.

Azevedo, P.F. and V.L.S. Silva, 2001. Contractual mix analysis in the Brazilian franchising, 5^th Conference of the International Society for New Institutional Economics – ISNIE, Berkeley, CA, September.

Bai, C.E. and Z. Tao, 2000. Franchising as a nexus of incentive devices for production involving brand name. Mimeo, University of Hong Kong.

Minkler, A.P. and T.A. Park, 1994. Asset specificity and vertical integration in franchising. Review of Industrial Organization, 9, 409-423.

Wimmer, B.S. and J.E. Garen, 1997. Moral hazard, asset specificity, implicit bonding, and compensation: the case of franchising. Economic Inquiry, XXXV: 544-554.

Evolutionary Ownership Structure in Post Privatization Phase and Its Impact on Corporate Performance in Poland: a Comparative Study of Polish Publicly Traded Enterprises: Privatized and Private Companies
Agnieszka SLOMKA
Warsaw School of Economics

The primary aim of the proposed study is to examine the evolutionary ownership structure in a transition economy with special attention to its function in improving corporate performance. The Polish transformation provides a unique opportunity to investigate the issue, where the ownership structure has changed under the pressure of state regulations and market forces. Over the past 10 years of transformation, Poland has altered the economic landscape by transferring assets from government-controlled enterprises to private hands or by emerging de novo private companies. The understanding of ownership structure’s effect is very important for policy makers, who select potential investors and decide about pace and scope of privatization that has significant impact on overall economy performance.

I will address three questions: (1) does corporate performance improve in the post privatization phase? (2) to what extent does concentrated ownership stimulate corporate performance? (3) whether the largest investor’s identity matters for the improvement?

To study the effect of ownership structure on corporate performance I examine dynamics of return on equity (ROE) to see whether owners are able to make managers act in their interests. Also, I will analyze the second measure: labor productivity. In transition economies, traditionally used profit measure is not accurate; because it is subjected to different changes in accounting regulations and takes into consideration extra subsidies from government. On the contrary, it is rather revenue that reveals entrepreneurial success. Besides, revenue is less subject on managerial manipulations and more transparent for outsiders as well as not burdened with the post-socialist history. Since revenue does not say much about effectiveness, thus I relate revenue with employment rate to examine labor productivity.

To create my sample I identified ownership structure of 216 Polish companies publicly traded on the Warsaw Stock Exchange (WSE) in 2001 and I examined corporate performance of those companies over the period 1998-2001.

This research confirms a positive interaction between corporate performance and ownership structure. The results of my investigation for are as follows:

1. higher ownership concentration is associated with higher value of labor productivity and return on equity

2. private ownership is associated with the better performance

3. the better corporate performance is associated with foreign strategic or financial investors, who delivers capital and market expertise as well as know-how

4. the corporate performance is higher and improves faster for the large enterprises.

Local Politicians, Firms, and the Federal Center:
The Anatomy of Provincial Protectionism
Konstantin SONIN
New Economic School and CEFIR, Moscow

So far, the results of two large de-facto federal states’ (China and Russia) transition from command to market have been profoundly different. Why in one of these countries market-preserving federalism has taken place, while the other is stuck with market-destroying federalism? A crucial difference between Russia and China's transition to market economy is that Russia entered it as a heavily industrialized economy, while China has a few large enterprises. This paper argues that this difference lies in the core of Russia' federalism failure: the possibility to extract rents and political support from the existing enterprises in exchange for protection against the federal center results in suppressing intra-regional competition and promotes soft-budget constraints for managers. At a more general level, the paper casts light on interaction of political institutions of federalism and economic performance.

There is an on-going discussion on what forms of federalism are more likely to foster economic development (Weingast, 2000). Careaga and Weingast (2000) argue that it is not plausible to judge one federal system against another solely on the basis of the level of decentralization. We extend this argument by noting that the level of decentralization is not necessarily a matter of the center's policy or a decision at a certain point. Rather, many federal structures emerged to be far different from those drafted (and written in books). For example, Russian constitution puts appointment of judges into the federal jurisdiction (with the intent to assure their independence). Nevertheless, regional powers have actually almost unrestricted influence over regional judiciary. In this paper, we focus on the origins of this federal structure and its persistence. In brief, initial rent-holders, e.g. management of large and often inefficient enterprises in the case of Russia, whose rents would be eliminated if a market-preserving federal system were in place, oppose any development in federal relations. (In fact, empowering regional political powers and eliminating central government's direct control of regional enterprises was a part of new Russian leadership strategy during the initial period of reforms. On this, see Shleifer and Treisman, (2000).

There is a number of recent papers reporting opportunistic behavior of Russian local politicians in their relations with the federal center. One empirical fact is that in Russia, huge federal tax arrears have been accumulated by large and productive enterprises in strong regions with governors having huge electoral support. This paper attempts to provide microfoundations and explain why some suggested policies (e.g., fiscal federalism arrangements such as performance-based transfer policy) have not helped out of the undesirable status quo.

The 'protection federalist system' works as follows. In equilibrium, regions with high percentage of value-creating firms and governors having huge political support choose tense relations to the center and protect their enterprises from paying federal taxes. The lack of means precludes the federal center from effective policy towards regions. In a region, the governor's aversion to cooperate with the federal center provides bad incentives for good regional firms: they do not pay federal taxes and bribe governors in exchange for protection. There are more restrictions on the entry of new firms, and thus less social welfare, than in an equilibrium without protection. As a result, federal tax non-payments (arrears) are concentrated in regions with large productive enterprises, and political strength of the governor accounts for accumulated tax arrears. At the regional level, governors are strong in those regions, where there are few good enterprises that do not compete with each other (i.e. belong to different industries). The basic intuition is that one can obtain a huge rent from good enterprises. This allows to provide transfers to bad enterprises, thus maintaining political power, thus maintaining bargaining power with large firms. The governor might oppose entrance of new (profitable) firms since they may reduce his rents via competition, and may provide political support to his political rivals. If there are few strong enterprises in a region, the governor's protection for these enterprises against the federal center leads to more restrictions on entry to the intra-regional market. Such situation might cause additional disincentives for enterprise management to restructure and payment of taxes, since it becomes more costly for governors to control a restructured (or paying taxes) enterprise. An additional problem is coordination between local leaders. They not only compete in protecting enterprises from the federal center as suggested in Treisman (1999), they co-operate with each other against the federal center.

A general message of the paper might be that a federalist system’s performance depends on economic fundamentals, and, if implanted to a country with a certain industrial structure, does not work without rule of law, supported either by strong independent courts and grass-root traditions (US or Great Britain) or powerful central authority (China).

Can Credit Markets Discipline Subnational Governments in Russia?
Andrey TIMOFEEV
CERGE-EI, Charles University, Prague

Access to credit markets is essential for the ability of subnational governments to develop local infrastructure without resorting to disruptive increases in tax rates. However, local governments might pursue an unsustainable borrowing path unless they face appropriate incentives. Up until recently there was little hierarchical control over subnational borrowing in Russia. However, data that became available after the new Budget Code required the maintenance of debt ledgers, report the accumulated stock of subnational debt to be at a modest level of twenty percent of annual subnational expenditures.

It can be argued that the market forces, being the only constraint on subnational borrowing, have generally precluded subnational governments from unsustainable borrowing. Indeed, credit markets can potentially correct irresponsible fiscal behavior by charging adequate risk premia or excluding a profligate jurisdiction from further borrowing altogether. However, to be effective, market forces require several general conditions to be in place: free and open markets for credit; access to information on the borrowers’ fiscal position; the borrower’s ability to promptly respond to market signals; and no expectations of a bailout. A bailout is more likely when the central government’s benefits from bailing out a jurisdiction are high or local government’s losses from a debt crisis are low. Thus, sustainability of the no-bailout condition is in part determined by intergovernmental arrangements, which delineate competences and taxing authority between the levels of government.

Although the average level of subnational government indebtedness is found to be low, several regional governments have accumulated a stock of debt exceeding the amount of their annual revenue. It would be interesting to determine which component of the market mechanism failed in those regions: whether the markets failed to send corrective signals to the governments, or the governments failed to respond to these signals. With the aim of determining whether extreme indebtedness of several regional governments is associated with weaker conditions for market discipline, this study examines institutional framework for subnational borrowing in Russia. In particular, I test the hypothesis that higher dependence of regional governments on federal financing results in lower default premia leading to larger volumes of outstanding debt.

Peculiarities of Investments in Contemporary Russia
Natalia N. TSYTOVICH
St. Petersburg State University

The topic of my research concerns peculiarities of investments in contemporary Russia.

This topic has real practical outcome because Russian economy needs investments to provide the beginning and stable growth in real sector of its economy. Expectations of the last 4 years that it is easy to provide attractive investment climate by changes in legislation, improvement in political stability and arising growth in economy appeared to be too optimistic. That means there exist some other reasons for that. Clearing those reasons may give chance of elaborating steps for improving investment climate in Russia.

On the other hand the topic has apparent scientific interest. Transformation of Russian economy to the market economy needs scientific analysis. Now we have 10 years experience of achievements and fails. That have to be analyzed, some conclusions should be made and plans for the forthcoming changes should be elaborated.

In my research I address such questions:

Why foreign investments do not come to Russia?

Is there any Russian capital ready to invest in Russian businesses?

What are the reasons for slow implementation of investment models which are effective in other economies?

In my research I use different analytical methods, statistics analysis, system analysis.

The Role of Dowry from a New Institutional Economics Approach: Evidence from Catalan Marriage Contracts in the Nineteenth Century
Raul VIEDMA-PONCE
Pompeu Fabra University

“The payment of dowry, or negative bride-price, remains unexplained by this analysis. Perhaps dowry is often simply a gift to the bride by her parents. […]. But much more work is needed on this question.” (Posner, 1980). Twenty-two years later Posner’s statement that much more work in needed on dowry still holds true. Though a quick glance to three different pieces of legislation throughout history are enough to reject Posner’s idea that dowry perhaps is simply a bride gift by her parents.

Dos est pecunia que pro muliere, vel ab illa, datur viro ad ferenda matrimonii onera (7,3,25 Digesto 530 A.D.)

El algo que da la muger al marido por razón de casamiento

( 11,11,4 Las Siete Partidas 1263 A.D.)

La dot est le bien que la femme apporte au mari pour supporter les charges du mariage

(Article 1540 French Civil Code 1804 A.D.)

We shall keep in mind that ancient lawyers and modern legislators agree on that the relevant issues about dowry are that it belongs to the marrying woman, it is administered by the husband, and it will be destined to support family expenditures.

The institution of dowry was already used in the late Roman Empire. It resurfaced in Europe in the Early Middle Ages and has survived in Mediterranean countries such as Italy, France, Greece or Catalonia for many centuries, disappearing only three decades ago. Dowry is still widely used in other countries such as India, Pakistan or China.

Very few papers have been published on dowry. According to Becker (1991) marriage is a joint venture that offers greater efficiency in production and higher expected total output than if spouses remained single. The role of market forces is emphasized in the assignment of mates and the distribution of returns among them. If the rule for division of output within marriage is inflexible, then the share of income of each spouse will not be the same as that under market solution, so a lump-sum compensatory transfer will be made between the spouses in order to restore efficiency. Thus if the wife’s share of family income is below her shadow price in the marriage market, then a bride-price will be paid by the groom’s family to the bride or her family; a transfer in reverse is called a dowry. In Becker’s model, bride-price and dowries are two sides of the same coin, distinguishable only by the direction of the transfer.

Botticini (1999) analyses the role of dowries and highlights those variables that affect the size of dowries in the fifteenth-century Tuscany. Her hypothesis is that the dowry depends upon the value of the bride’s contribution to the marital household. The larger the contribution of the bride to the marital household, the smaller the dowry. She found that larger dowries are associated with older brides, since younger brides will provide larger contributions to marital household and therefore get a smaller dowry from their parents.

Zhang and Chan (1999) reject Becker’s statement that inflexibility in division of output can result in the transfer of either a dowry or a bride-price, but not both. Empirical data show that in China both dowry and bride-price are paid in the same marriage. The authors propose to interpret the coexistence of dowries and price-brides as indicative of different functions they serve and formalize their main point in a model of intra-household allocation of resources.

Anderson (2000) studies the economics of dowry payments in Pakistan. He distinguishes three theories of dowry and develops a model which embeds these three potential roles for dowry in a matching model of marriage. Goody (1998) views dowries as intergenerational transfers of wealth that play an important welfare and insurance role. He analyses how modern divorce laws have driven many parents to delay pre-mortem transfers of family property for fear that their property would be taken away by temporary sons- and daughters-in-law.

This paper aims to examine dowry from a New Institutional Economics. This entails locating the institution of dowry not on a market-oriented framework but on a transaction cost framework. The marriage contract promises gains to both parties who enter it. Allocation of property rights will decide how these gains will be divided, as well as protect these gains from expropriation. As Cohen (1987) points out, there seems to be a structural conflict in marriage due to the problem that “the period of time over which gains are realized is not symmetrical. As a rule, men obtain gains early in the relationship when their own contributions to the marriage are relatively low and that of their wives relatively great. Later on in marriage, women tend as a general rule to obtain more from the contract than do men. This provides the opportunity of strategic behavior whereby a man generally might find it in his interests to breach the contract,[…] partly capturing and partly destroying her wife’s quasi-rents.” Unless law is able to design institutions that prevent strategic behavior wives will be incentived to under-invest in marriage (i.e. having less children or acquiring more marketable skills). A second major issue in the transaction cost analysis of marriage is the design of efficient family governance mechanisms, which basically takes place through the allocation of decision rights on the household assets. We predict that dowry plays an important role on both issues.

To support our work and hypothesis the paper will analyse the marriage contracts signed in the city of Barcelona throughout the 19^th century. Catalonia offers an opportunity to study dowry because it has an old and large tradition for couples to sign prenuptial contracts that contain a variety of property arrangements, and because these marriage contracts are kept in a Record Office and can be consulted after the lapse of 100 years. We intend to collect a sample of 500 marriage contracts signed between 1801 and 1900 from the Archiu Historic Notarial (an historical notary Record Office).

Political Institutions, Government, and the Policy-Making Process
Mario VILLARREAL DÍAZ
Claremont Graduate University

My current research interest is broadly related with the role, structure and evolution of political institutions and its impact on economic performance. More specifically, I’m interested in the dynamics of the political process of economic policymaking and how the potential distributional effects and political transaction cost structure influence political behavior and economic outcomes. As a preliminary approach to the topic, I’m working on the evolution of the growth on the relative size of government and how this trend is related with alternative institutional arrangement.

At this stage of my research agenda I’m working on a first approach to the topic, analyzing the dynamics of relative government expenditures with particular emphasis on the impact of federalist structures and levels of democracy. Preliminary findings from the use of a panel data fixed effects model suggest that federal regimes tend to reduce the relative size of government compare to non-federal regimes. However, as a federal country moves toward a more democratic regime, the relative size of government increases. These findings seem to propose two potential opposite trends on the growth of the relative size of government: On one hand, fiscal decentralization increases the efficiency of government, but on the other hand it looks like there is a cost on the development of democratic institutions or a increase in the demands of a larger winning coalition, typical from more democratic regimes.

Optimal Methods and Sequencing of Privatization:
Theory and Evidence from Vietnam
Anh T. VU
Boston College

In the early 1990s, recommendations of mainstream economists to transition economies were based on the Washington consensus, in which transition was not considered an indigenous process, and institutional and social contexts in which the transition occurs were largely ignored.

Recently the emphasis has shifted to the institutional approach pioneered by Coase, North, and Williamson, among others. This approach views transition as a process of building an institutional framework that supports a market economy. My research project entitled “Optimal Methods and Sequencing of Privatization: Theory and Evidence from Vietnam” is in this tradition.

Vietnam’s enterprise restructuring program started in 1992, but by early 1998 only 17 state-owned enterprises (SOEs) were voluntarily privatized. The program was accelerated from July 1998 and about 900 SOEs have been privatized so far. Between 2002 and 2005, Vietnam plans to restructure about 4,700 remaining SOEs, of which about 2,700 SOEs will be privatized by four different methods. To the best of my knowledge, there have been no theoretical and empirical studies of this large-scale restructuring phenomenon. My research project addresses this gap in the literature.

I conceptualize privatization as the means of transferring the ownership and control rights from the state to private shareholders and managers. In essence, privatization transforms the ownership and corporate governance structures of the firms, which subsequently affects enterprise restructuring.

My research project consists of two parts. The first part is a theoretical paper that addresses two related questions:

Given a firm with certain characteristics, what is its optimal method of privatization?

If the government is to design the privatization plan, what is the optimal sequencing of privatization?

One distinctive feature of my research is that the privatization problem will be embedded in the Vietnam’s institutional environment. This embeddedness, although profoundly important, has been largely ignored in the formal treatment of privatization. I believe that my treatment of embeddedness will contribute to the literature.

The testable predictions of the theoretical paper will then be subjected to empirical analysis, which is the second part of my research project. My hope is that the insights and findings of this paper can serve as policy guidance for Vietnam’s privatization program.

Do African Legislatures Matter for Public Spending?
The Case of Ghana
Yongmei ZHOU
The World Bank

The development community has been struggling with how to help sub-Saharan African countries improve the effectiveness and accountability of their public policies and spending. Targeting the executive branch of government for technical assistance proves an ineffective strategy. Given that in most countries the legislature is nation’s legislative body, deliberative forum, “purse holder,” and overseer of government operation, would strengthening the capacity of legislatures lead to increased oversight and improved effectiveness and accountability of public policy and spending?

It is in this context that we initiated this study of the Ghanaian legislature as part of a regional comparative study. So far, we have conducted semi-structured interviews of select members of parliament, parliamentary staff, opinion leaders in three constituencies, ministers and senior civil servants, representatives of civil society organizations and professional associations. We also studied verbatim recording of parliamentary debates in the Fourth Republic (1992-date).

Our overview of parliamentary impact is mixed. Although parliament has become much more vocal and assertive since its return to multiparty democracy in 1992, it has not yet improved the effectiveness and accountability of public policies and spending. Two main indicators were used to measure parliamentary impact on public policy and spending. The first is the extent to which private interest groups and public interest groups lobby parliament for particular policies. The second is the number of private member legislation and the substantive changes parliament effects on legislations proposed by the executive. Parliamentarians are preoccupied with “zero-sum” competition for national resource based on personalized network, rather than collectively as a group pushing for more transparent means of allocating national resources, such as through fiscal decentralization.

We analyze the factors that limit parliamentary impact focusing particularly on 1) executive-legislative relationship, 2) legislator-constituent relationship, 3) parliamentary procedures, 4) the committee mechanism. Based on the analysis we make recommendations on institution-building measures that can help parliament meet the next challenge of translating “voice” into real impact.

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