KNOWLEDGE TRANSFER, INNOVATION AND SPACE:
A NEW LOOK AT TECHNOLOGY CLUSTERS
Neslihan Aydogan
The University of Maastricht

Firms strategize by employing different forms of governance structures. In this paper, I investigate the effects of spatial proximity and the characteristics of firm assets on governance. I hypothesize that proximity and network relations facilitate monitoring partner actions. This is especially important when firms engage in alliances for which mutual alliance activities involve ex-post tacit-skill transfer. This is because I claim such exchange is likely to involve a high risk of partner cheating based on the difficulty of monitoring partner’s actions. Hence, ceteris peribus, in the absence of spatial proximity and network relations, integration is likely to be the most efficient choice of governance. In order to conduct this analysis, I apply and expand the transaction cost economics paradigm. Specifically, I claim that the exchange characteristics of firm assets, in this case skills, and spatial proximity among partners, are critical determinants of choice in firm governance. In addition, I introduce a more elaborate disaggregation, grouping and ranking of alliances than it is adopted in Williamson (1991). I construct such disaggregation and ranking by employing the contract law and empirical evidence.

To test the hypotheses in this study I employ a data set, which includes 480 observations on the alliance activity of Silicon Valley firms for the time period 1991-1998. I construct a skill quotient variable to quantify the tacitness of skills that are employed to conduct the mutual alliance activities for each alliance in the data set. I find that a typical Silicon Valley firm prefers to engage in alliances which are close to integration in form when the mutual alliance activities are skill intensive, partnership involves research activities, the alliance includes more than two partners, at least one partner is located outside Silicon Valley or as the distance with at least one partner increases. In addition, 46% of all Valley firm partners are located in Santa Clara County and rest of California and of these agreements 51% are close to market agreements.


PROPERTY RIGHTS AND ENFORCEMENT COSTS:
AN EMPIRICAL TEST USING MORTGAGE CONTRACTS
Petar Balachev
Universitat Pompeu Fabra, Barcelona

The exchange value of an asset depends on the enforcement of the associated property rights. Enforcement is enhanced by the more precise definition of property rights. At the same time, the more precise definition entails higher enforcement costs.

This paper is an empirical study of this relationship between the precision of the definition of the property rights associated with an asset, asset value, and the enforcement cost of these rights. It investigates whether the higher asset value and the greater number of associated property rights are related to higher enforcement costs.

The test is based on a sample of publicly registered mortgage contracts, which include the definition of the property rights and the lender’s estimate of the enforcement costs. The results of the statistical analysis lend support to the hypothesis.


ANALYSIS OF ECONOMIC POLICY INITIATIVES IN MONGOLIA
Jamiyandorjiin Batkhuyag
Institute of Finance and Economics, Ulaanbaatar

Mongolia has been following the path of post-communist transformation similar to those of Russia and the Newly Independent States. However it has own specifics of developing market institutions and behavior. Mongolia has mixed characteristics of mining export and aid- dependence and traditional nomadic animal husbandry culture. Mongols has the second longest experience of under Soviet style harsh communism and has been isolated from the western democracy and international markets by geopolitics.

Sudden collapse of communism and the Soviet Union brought independence and democracy to Mongolia. Mongolia has been one of the most committed to transition initiating simultaneous political and economic reforms rare in region. Ambitious large-scale privatization program was carried out relatively successfully and now private sector share accounts for over 73 percent of GDP.
 
The main objective of this research is to analyze some economic policy initiatives of the current modest left-wing Government of Mongolia aimed to establish property rights and improve governance within the framework of new institutional economics. Mongolian Parliament recently has adopted several reform-oriented laws. The most important of them are New Revision of the Civil and Criminal Law, Law on Privatization Land to Mongolian Citizens and they will be focus of this empirical research. New Civil and Criminal law reflecting both Roman continental law tradition and communist legacy “inertia” aimed to increase degree of public acceptance of rules of game and play in property rights, contracts and their improved governance and enforcement. Some major amendments and changes are proposed with good intentions. The Law of Privatization Land stipulates regulations and procedures for initial distribution of urban and agricultural farmland first time in Mongolian nomadic animal husbandry dominant economic history. There are significant public and opposition criticism of land privatization scheme due to start May1, 2004.
 
The research questions to be addressed are:
● Impact of new law provisions for improvement in the private business environment and institutional development of market system in Mongolia
● How initial transfer of land will affect property right institutions in Mongolia and possible further privatization of pasture lands.


MARKET-PRESERVING FEDERALISM, SPANISH STYLE
Gonzalo Caballero
University of Vigo, Spain

The fundamental political dilemma of an economic system is that a government strong enough to protect property rights and enforce contracts is also strong enough to confiscate the wealth of its citizen. In this sense, the political foundations of the markets constitute key variables to explain economic development, and “market-preserving federalism” particularly constitutes a type of governance structure that credibly commit the State to preserving markets (Weingast, 1995).
This paper analyses the Spanish recent experience of economic-policy decentralisation and tests the hypothesis of the “market-preserving federalism” for the Spanish case. In this sense, the “market-preserving federalism, Spanish style” is characterised and some lessons are extracted.

Decentralisation was the most innovate institutional feature of democratic Spain. The 1978 Spanish Constitution analysed as a contract is characterised in material of the decentralisation model by a high level of incompleteness (Dixit, 1996): in fact, it defined minimum bases but left the model open. In this way, an evolutionary and transactional approach became necessary to analise the sequence of the Spanish State towards the present levels of high decentralisation.

In spite of the Spanish model of decentralisation has evolved towards a point that is close to the system of the “market-preserving federalism”, the Spanish State of Autonomies is the source of several imbalances. In particular, the paper discovers two institutional elements that explain the inefficiencies of the “market-preserving federalism, Spanish style”:

On one hand, the system of autonomic financing supposed a minimal collection of their own revenues on the part of the regional government, despite a growing decentralization of spending. In this way, the regional governments did not assume the economic cost of their political decisions, by which the political competition between regions was not viable. In particular, the structure of share revenues supposed a “pact with the devil”, in the sense of Careaga and Weingast (2000), that gives incentives to the autonomous government to slant their decisions in a sense to be captured by particular interests and not to bet on market making

The Upper Chamber of Spanish Parliament does not adequately incorporate representation of the regional government, and does not constitute a decisive agent in policy-making. The Senate does not break the strong concentration of central government power, and as it does not obtain a horizontal division of power, the vertical division become much weaker. The self-enforcing character of the system makes the reform of the Senate impracticable, and makes that the Senate continues as a “blunt veto player”.


FISCAL DECENTRALIZATION AND LABOR MOBILITY: 
AN ANALYSIS OF CHINESE LOCAL GOVERNMENTS’ INCENTIVES
TO PROMOTE “INTERNAL LABOR SMUGGLING”
Yiu Por Chen
Graduate Program of Urban Planning, Columbia University

What are the driving forces behind labor policy changes in contemporary China?  This paper argues that fiscal decentralization had an effect on labor policy change.  In past studies, fiscal federalism has been regarded as a device to induce market development.  This paper extends this argument by examining the incentives to promote market development through labor mobility within different levels of government.  I constructed a panel data of provincial labor migration with indices integrating the central/provincial level’s fiscal decentralization, the sub-provincial level’s fiscal need, and sub-provincial governance cost’s index.  Deploying a gravity model, I show that, while the central government was trying to restrict labor mobility, local governments have induced a Hecksher-Ohlin type inter-provincial labor migration. Second, the fiscal incentive to promote the rural-rural labor mobility is strongest at the village (lowest) level, moderate at the town (middle) level, and very weak at the provincial (highest) level of fiscal decentralization.  Third, the model shows transaction costs for governance of non-hukou labor mobility at the sub-provincial level is prevailing due to the increasing number of town governments as well as village committees.   The results may suggest an emerging conflict of interest as a consequence of fiscal decentralization: this collusion (to induce labor flow) among sub-provincial level governments and with migrants that changed, eventually, the Central government policy (on labor control).


A HISTORIC PERSPECTIVE ON ECONOMIC REFORMS IN PERU
Daniel Cordova
School of Economics, Universidad Peruana de Ciencias Aplicadas

Towards the beginning of the year 2003, Peru lived a relatively stable economic situation, which was reflected by the main macroeconomic indicators (low inflation, high growth, positive trade balance, low country risk indicator). According to the first hypothesis of our research this relatively stable situation of the Peruvian economy is related with a set of institutional reforms that were carried out during the 1990’s. These reforms modified the institutional framework for the formal sector, enhancing economic and legal stability, underpinning savings and investments –including direct external investments–, improving access to services like telephones and electricity, orienting production to exports (and allowing cheaper imports), among others facts related to a relatively better environment for businesses. The reforms to be analyzed on the basis of empirical analyses already carried out are the following: fiscal reform (administration and public spending system), monetary and banking reform, privatizations, creation of autonomous agencies to regulate competition, reform of the pension funds system, commercial and customs system reform, and reform in the currency and capital markets.

Nevertheless we point out that these positive reforms became popular and were possible within a special political framework after a chaotic economic and political experience during the 1980´s. This chaotic situation opened a window for market-oriented reforms. But the window was opened only for a few years. Currently the same reforms are not popular anymore. In fact they are in jeopardy for ideological and political reasons. On the other hand institutional reforms that were never undertook such those related to the property rights system and the judiciary system reform are not anymore in the political agenda. According to the second hypothesis of our research the reforms of the 1990´s did not modified dramatically the economic structure and the ideological and cultural path dependence in Peru.
Our research will show how useful are some of the concepts of the new institutional economics (mostly the relationship between institutions reforms and growth, and the role of path dependence) to understand the economic history of a country like Peru.


THE DARK SIDE OF FEDERALISM:
DECENTRALIZATION AND THE ENFORCEMENT
OF INTELLECTUAL PROPERTY RIGHTS (IPR) LAWS
Martin Dimitrov
Department of Political Science, Stanford University

While previous studies of federalism have tended to stress its positive effects, my research focuses on the dark side of federalism. I ask a simple question: what is the impact of political decentralization on bureaucratic compliance? I argue that by design federalism creates incentives for bureaucratic shirking: multiple principals (executive, legislature, courts) with conflicting preferences over policy, operating at multiple levels of government (federal, state, and local), will try to pull implementing agencies in different directions. It may be difficult or impossible for an agency to comply with the preferences of all its principals. It may also be difficult to ascertain whether an agency did comply with the preferences of its principals, particularly when those are not unified. Therefore, absent effective mechanisms for controlling bureaucratic compliance, two outcomes can be expected: agencies will try to shirk or will enforce the law after taking a bribe. By contrast, in a unitary system, agencies usually have a single principal (if political power is centralized both horizontally and vertically), making it easier for the agency to infer the principal’s preferences and for the principal to monitor whether the agency has complied with her preferences. Therefore, an agency operating in a unitary system is subjected to clearer accountability standards and stricter monitoring than an agency operating in a federal system.

In order to test my hypothesis that agencies in unitary states provide more enforcement than agencies in federal states, I compiled my own dataset on the variation in the criminal enforcement of intellectual property rights (IPR) laws in 32 countries (15 federal, 17 unitary).¹ Results from statistical regressions performed using the dataset show that federalism is a highly significant predictor of lower enforcement rates, controlling for GDP. This empirical finding begs the question why agencies in federal states are less likely to enforce the law than identical agencies operating in unitary states? I argue that the horizontal and vertical decentralization of power in federal states makes it harder to monitor bureaucratic compliance. As a result, under-enforcement and shirking occur in federal states, while higher enforcement rates can be observed in unitary states.

¹ Only 37 countries worldwide criminalize the infringement of IPR laws. Therefore, my sample represents over 80% of the population.


PROFESSIONAL LICENSING REGULATION AS NON-TARIFF MEASURES:
THE TRADE IN ENGINEERING SERVICES
Marina Fe B. Durano
School of Economic Studies, University of Manchester

Regulation in the services industry is justified by efficiency considerations brought on by natural monopoly and asymmetric information.Service provision is prone to market failures due to the intangibility of its output and irreversibility of its results. Intangibility implies that services will be difficult to measure, such that standards will be difficult to set and maintain. Irreversibility implies that welfare losses associated with contract abuse can be very large. The role of institutions in the services sector is thus emphasized because a regulatory and institutional system that minimizes the transactions costs of both supplier and buyer for showing and ascertaining quality is necessary. Institutions, therefore, cover up the market failures. This is also known as the public interest justification for regulation and licensing.
Regulation and licensing can also limit the number of providers even if they have adequate qualifications. This anti-competitive effect is known as a private interest explanation of regulation. The anti-competitive effect has been the focus of many international trade discussions as the type of regulations that should be considered as non-tariff measures in the trade in services.

This paper looks at the impact of the regulatory measures on the probability of a country being chosen by a potential foreign provider of engineering services. Regulatory measures are considered as choice-specific characteristics; hence, a conditional logit model is estimated on survey data of engineers from the Philippines working abroad. The independent variables include two regulatory indexes reconstructed from data found in Nguyen-Hong (2000): the entry index covering most of the migration rules and policies; and, the practice index which covers rules and regulations that directly govern the practice of the profession Differences in regulations applied to domestic providers versus foreign providers were identified. The other variables are gross national income per capita, distance and distance-squared.

Predicted probabilities will indicate whether a country is relatively open to the trade in engineering services. The elasticities will indicate the relative importance of a particular regulatory index as a non-tariff measure.


THE REASONS FOR THE FORMATION OF BUSINESS GROUPS IN ARMENIA
Tigran Jrbashyan
UNDP and Ministry of Trade and Economy of Armenia

Most existing research on business groups has argued that these groups improve the investment element for members of the group. We take a different approach and argue that the formation of business groups under conditions of less developed markets provides a mean for overcoming institutional shortcomings. Using transaction cost theory, we conduct a comparative survey of enterprises (members of business groups and independent firms), to find out whether the formation of business groups in Armenia reduces the costs of normal interaction and trade.

In contrast to developed countries, in many developing countries business groups are not only successful, but also hold dominate positions in certain markets. Most researchers argue that these business groups create such structures that, as a rule, substitute for capital and intermediate product market imperfections. From the other side, institutional weakness is also an important reason of formation of business groups in developing countries. In some cases, as is shown in the research, this reason could be the primary motivation for creating business groups. Imperfect and unstable legislation and it’s enforcement, corruption, weak democracy institutions and absence of self-regulation, non-completion with contracts leads to more internal transactions, the needs for more control over management, direct forms of lobbing (gaining benefits, preferences, government orders and etc.).

Transition economies, no doubt, stand out as imperfection in market is severe and institutions are weak. At the same time, transitions countries inherited a complex structure of industry with huge and technologically interrelated enterprises. In such conditions there are more factors that favor the formation of business groups. At the time present there are a number of studies of peculiarities of formation and activity of business groups in transition countries (Russia, China). These studies mainly reflect the peculiarities of their activity as investment re-allocation systems in terms of absence of perfect capital markets. Nevertheless, problems of functioning of business groups where financial aspects are limited have not been considered yet. Armenia is an example of a country, which has succeeded in creating a liberal model open market economy. Nevertheless, issues of functioning of business groups, their formation and activities have not been examined and the policy implications have not been studied. But these structures play a significant role in economic development and in civil society formation.

The absence of large investment, at least at the first stage of development, suggests that there is another reason for the development of business groups. Our research is devoted to the examination of institutional weakness and its influence on business group formation and activity in Armenia.


MAKING SENSE OF THE TRANSITION: THE CZECH EXPERIENCE
Radovan Kacin
University of Economics Prague

In 1989, most economists thought the problem of the transition was one of allowing prices to float to market clearing levels.  After all one of the most observable problems throughout the former socialist economies was the existence of pervasive shortages.  Indeed prices did need to be freed up.  In the Czech Republic most prices were freed overnight, making it one of the crucial reform signals to the public.  But we learned in the process that free pricing required a network of institutional reforms to define and enforce private property rights and secure the freedom of contract.

This paper looks at the Czech experience with reforms and studies some characteristic behavior emerging during and after privatization using insights from new institutional and Austrian viewpoints.

While less known than mass voucher privatization or direct sales, significant privatization was done on small scale.  It can be considered a clear success.  Not so all direct sales to present management.  Some authors argued that management skills in socialist companies do not differ from companies in a free market setting, nevertheless the biggest privatization flops are in this category.

Another phenomena worth noting in this regard is the protection of minority shareholders.  After some spectacular failures of investment funds in the mid 90’s the call intensified to establish formal attributes of capital market, mainly Securities and Exchanges Commission (SEC), regulation of brokerage firms, and implementing laws to protect minority shareholders.

While the number of brokerage firms declined and their professionalism increased, some former capital market actors became “professional” minority shareholders using dubious extortion tactics in blocking transactions such as mergers. This can be a significant problem, as diffuse (and not transparent enough) ownership is typical outcome of voucher privatization schemes.

The author will illustrate, based on his experience as auctioneer organizing involuntary public auctions, that some of these racketeers indeed provide valuable service to stockowners; nevertheless usually they are significantly increasing the transaction costs of acquiring ownership in companies.
The outlined phenomena might indeed hint that the reform was a disappointment, but they not making the reform reversible, which was one of the principal goals.


ENDOGENOUS SOCIAL CAPITAL FORMATION IN THE PRESENCE
OF NETWORK EFFECTS AND CULTURAL DIFFERENCES:
ARE MINORITIES DOOMED TO LAG BEHIND?
Martin Kahanec
Center Tilberg University

In this theoretical research, I study how cultural distances, community sizes, and external network effects affect endogenous formation of social capital in the context of majority-minority relationship; and how they may cause the minority to lag behind.

This research is motivated by but not limited to the two cases of, first, the Roma ethnic minority and, second, the Jewish ethno-religious minority in Central and Eastern Europe. These two minorities are similar in many aspects and their historical experiences. However, they significantly differ in their levels of, inter alia, educational attainments, health standards, and income and wealth levels.

These contrasting outcomes of similar histories urge me to ask the following questions:
1. Why do some minorities suffer from underdevelopment, poverty, and social exclusion over the long run, while others do not?
2. Can we explain this phenomenon by studying the formation of social capitals by minorities and majorities?
3. Can the asymmetry in social capitals in a majority-minority relationship, leading to asymmetry in development levels, arise endogenously even in a symmetric world that is characterized by
● homogenous agents with respect to their available technologies, preferences, and endowments and the minority and majority members differing only in their cultural heritage and relative numerousness,
● frictionless markets for ideas, technologies, goods, and labor,
● and (even) non-existent ethnic discrimination?
4. Can we explain why some minorities escape the underdevelopment trap and some not if we assume that costly human capital accumulation reduces the cultural incompatibility between minorities and majorities?

I propose that it is the interplay between
1. the network externalities present in social networks and thus in the acquisition and accumulation of social capital,
2. the different sizes of the minority and majority populations,
3. the cultural distance between the minority and the majority which obstructs the ability of people to extract benefits from membership in social networks or interpersonal ties based on different cultural capitals,
that determines returns to inventing and maintaining social networks and prevents the minority from attaining the same level of development as the majority is. Furthermore, the differences in cultures, the sizes of minority communities, and the degrees of within-minority segregation explain why some minorities are underdeveloped while others are not. 


A FRAMEWORK FOR AN UNDERSTANDING OF INTERNAL HYBRIDS
Judit Kapás
University of Debrecen, Hungary

Problem and purpose of the research
Nowadays there is a tendency again for decentralized structures, and some argue that the New Economy favors markets. However, this process is twofold. On the one hand, a firm is infused with market-like elements, which leads to the transformation of Chandlerian firms into internal hybrids encompassing small molecular units. On the other hand, the disintegration process creates network-like relations between firms that are called external hybrids.
I have two objectives in my planned research work: the first is to provide an explanation for the nature of internal hybrids, and the second is, as a by-product of this, to develop a general framework for a linked understanding of firms, markets and external hybrids.

Hypothesis
Based on my previous research, I propose not to consider internal hybrids new organizational forms, but the newest mutants of the firm, and accordingly, to distinguish three arenas of coordination, namely firm, market and external hybrids that partly substitute, partly complement one another.

Description of the project
My research will consist of two parts. The first is a theoretical one; the second will be an empirical investigation. As a starting point of the theoretical understanding I elaborate on the clarification of some concepts that are rather vague in the literature, namely exchange, firm, market, organizational form. By doing this, I combine the views of the NIE, the OIE and the Austrian economics. Having clarified these, I come up with a theory of the firm that is able to explain the different forms of the firm (centralized hierarchy, M form, internal hybrids) as well as the multiplicity of internal hybrids. I introduce two key concepts, "firm-ness" and "marketness", which leads us to a more general framework in which firm, market and external hybrids can be explained simultaneously. In order to build such a theory we have to find out the content of "firm-ness" and "marketness" and the factors that influence what the arena of the coordination for a given transaction will be. This should be partly supported by the second part of the research, which will be an empirical investigation carried out among Hungarian firms. This part will contribute to a classification of internal hybrids as well as an explanation of what determines the choice among them.

INFORMATION, NEWS AND NOISE:A HUNGARIAN CASE
György Komáromi
University of Veszprém, Hungary

In my current research I am focusing on the theoretical question; how to distinguish the noise and the information in financial markets. In the financial literature (Black 1986) there are two types of investors, first one trades on information (relevant to the fundamental value of the asset) and the second one is the noise-trader, who trades on irrelevant information, that is noise. Up to the latest financial research and models (Shleifer 2000) the previous a prior definitions for information and noise have been used, and hitherto we have not got the a posterior descriptions. Adopting the main idea of information theory (Shannon et al 1964), in which the information makes entropy lower in the system, we can formulate the a posterior criterion for the information related to a financial asset: the more information-trading the lower volatility of the asset can be observed. (Critical and further questions: Mayumi 1997, Drees et al 2000).

Information is a subjective term depending on the individual’s own judgement, while the news can be considered as an objective term, that can be measured by the numbers of articles, data, figures, etc . As Keynes’ (1936) suggested, the linkage between information and news is the individual’s opinion. Some of the news are perceived as information, I use the criterion above to decide whether the particular news has relevant information or not. Adopting the methods of Eilifsen (2001), Bhattacharya et al (2000) and Morck et al (2000) I use financial data of Hungarian stocks from Budapest Stock Exchange (BSE) to make a classification of news depending on its impacts on the stock volatility, and different scenarios of the possible reasons. I examine on the impacts of the announcements of dividends, the periods before and after ex dividend date, the big events related to the business of the companies listed in BSE. I also compare my findings to the relevant international research, making clear the special features of the Hungarian stock market, and try to identify its reasons.

ADJUSTING BOUNDARIES OF RUSSIAN FIRMS
Olga Lazareva
Central Economics and Mathematics Institute, Moscow

Since Coase, economists asked the question: what determines boundaries of a firm? Various theories were developed to find an explanation. Theory developed by Coase, Williamson and others shows that transaction costs play important role in the decision to arrange certain transactions along the production chain across the market or inside the firm.

During the last decade Russian industrial sector has undergone most dramatic changes. Industrial output had fallen by 40-60% in different sectors.  At the same time we witnessed huge wave of reorganizations. Firms adjusted their boundaries according to new economic conditions. The collapse of planned economy and Soviet Union triggered massive breakups of large Soviet enterprises, which were significantly oversized. This process coupled with mass privatization of 1992-1994 gave rise to a wave of split-ups and spin-offs. At the same time, in absence of efficiently functioning resource and product markets and in conditions of general economic instability enterprises had to integrate with their suppliers and buyers in order to reconstruct production chains.

Consequently, the common perception is that Russian firms reshaped their boundaries dramatically. The purpose of my research is twofold. First, I would like to reveal the factors influencing firm’s decision to integrate or split up. In doing this, we need to understand whether institutional structure of production, inherited from planned economy and characterized by high degree of monopolization and specificity, influenced the process of reorganizations of Russian industrial firms.  Second, I aim to understand whether adjustment of boundaries of the firms helped them to perform better, that is, whether they became more efficient. 

In order to answer these questions I conduct an empirical analysis using data from the recent survey of Russian manufacturing enterprises. To find the determinants of reorganizations, I test the importance of the following factors: asset specificity, lock-in effect in relations with suppliers, concentration of product and input markets, managerial ownership share, pre-reorganization size and productivity.

Up to the moment there was no extensive empirical study of the reorganizations of Russian firms covering all industrial sectors. Current research is intended to fill this gap, with the emphasis on institutional nature of firm boundary change.


DECENTRALIZATION AND FOREST GOVERNANCE IN INDONESIA
Charles Palmer
Center for Development Research (ZEF), Bonn

Since the fall of ex-President Suharto’s highly centralized government in 1997, the Republic of Indonesia has undergone a rapid process of decentralization in terms of institutions and the control for natural resources. This process, both formal and informal has been taking place against the background of increased democratization. This research proposal focuses on the affects of these decentralization reforms on forest governance and the welfare of forest-dependent communities. Forestry, as an economically important natural resource sector is also one that has undergone rapid ecological degradation in the last 30 years.

The complete decentralization of the forest sector in Indonesia and its principal output, timber, has occurred in a haphazard manner, from a centralized system of logging concessions to one controlled by over 300 newly created district-level governments. Consequently, for the first time since the 1960s, forest dependent communities have a stake in their land, free from centralized control and in spite of the current economic and political uncertainties in the country. Since the reform of Indonesia’s Forestry Law in 1998, communities have been allowed to negotiate forest land with logging companies in exchange for financial and social benefits under a new regulatory framework.

Preliminary empirical research indicates a large variation in the benefits that communities receive from companies, the ecological costs and the processes of negotiation, contract compliance and enforcement. ‘Self-enforcement’ and conflicts between communities and companies is a recurring theme as is collusion between companies and local government officials. The research objectives are to assess the outcomes from these negotiations and to determine what principal factors drive these outcomes and how. A conceptual model of negotiations has been developed using non-cooperative bargaining theory and conflicts modelled using ‘War of Attrition’ theory. In addition, research has been undertaken using the theory of Common Pool Resources (CPR) and rent-seeking, the latter reflecting the high level of rents available in the logging sector and the current high level of corruption present in public life. Empirical research in Indonesia at the community level will be undertaken to test the conceptual findings in 2003, with policy implications as a research goal.


INSTITUTIONS, BUREAUCRATIC CORRUPTION AND TAX EVASION IN TRANSITION ECONOMIES
Violeta Piculescu
Bucharest, Romania

The purpose of this project is to analyze how taxation, the quality of institutions and bureaucratic corruption affect firms’ decisions to evade taxes in the post-communist countries. There are two main directions in which we intend to extend the existing knowledge on the incentives that firms may have in undertaking unofficial activities. Firstly, with respect to taxation, we believe that the weak empirical link between taxation and unofficial sector activities, as found in previous studies, is due to the fact that the existing approach focuses on the absolute levels of taxes across countries. We hypothesize that it is not the absolute level of taxes that influence the firms’ decisions to operate in the underground sector, but the firms’ perceptions on how high the statutory tax level is relative to a threshold level. The threshold level of the tax rate represents the level that the firm is willing to tolerate given the quality of the business environment in which it operates. The threshold level is therefore firm – specific, and it depends on the benefits that the firm can extract while active in the official sector. Such benefits relate to the quality of institutions that support firm’s activities in the official sector. Secondly, with respect to the role of bureaucratic corruption, we intend to analyze an alternative hypothesis on the role of bureaucratic corruption: in order to evade taxes, firms often need to bribe public officials in charge with the inspection of firm’s activities. Therefore, instead of acting as a tax on firm’s profits in the official sector, bureaucratic corruption enables generation of profits in the unofficial sector. Empirical analysis in this study relies in the BEEPS survey data reported by World Bank for firms in 20 transition economies, year 1999.


EVOLUTION OF DEMAND FOR PROPERTY RIGHTS IN RUSSIA:
COMPARATIVE EVIDENCE FROM MANUFACTURING
AND EXTRACTIVE INDUSTRIES (1987-2002)
Anton B. Runov
State University – Higher School of Economics, Moscow

In this research the new economic history framework [North, Thomas, 1973; North, 1981; Libecap, 1978; 1989] is applied to analyze spontaneous privatization (1987-1991), mass privatization (1992-1994) and subsequent redistribution of property rights (1995-2002) in Russia. The analysis is focused on contracting for attenuation and specification of property rights. A comparison of the demand for property rights in two main sectors of Russian industry is made. The first sector includes extractive and raw resources industries (oil, gas, and basic metals). The second comprises manufacturing industries (chemical, machine-building and metalworking industries).

The following preliminary conclusions are drawn:
1. There was an endogenous demand for attenuation of loyalty-based property rights (1987-1991) that constituted the institutional environment of soviet-type economy. It was necessary because the old system of property rights was associated with communist ideology and despotic state. The “depolitization” [Shleifer, 1994] in this sense was a completion phase of this process. The main factors of attenuation are:
a) Change in relative prices: rise in extractive export-oriented industries and fall in manufacturing industries (especially military-industrial sector);
b) Change in the size of market caused by opening of soviet economy;
c) Decline of share mental models based on communist ideology. d) Shortcomings of hierarchy as a governance mechanism in comparison with market.
However,
2. Forced corporatization and mass voucher privatization (1992-1994) became an institutional shock for contractual arrangements in the industry, followed by disorganization [Blanchard, Cremer, 1997]. Along with transformational recession [Kornai, 1994] it led to de facto open-access problem to privatized enterprises. It entailed dissipation of quasi-rent, investment collapse and absence of restructuring.
3. The demand for assignment and enforcement of law-based private property rights differs in the two sectors. While in extractive and export-oriented industries it appeared right after the shock, manufacturing industries showed it only after the 1998 financial crisis.

Available data include: Case-study of 8 privatized large and medium industrial enterprises (1987-2001) for qualitative understanding are conducted in 2000-2002 in Nizhny Novgorod region (one of the highly developed industrial regions of the Russian Federation). Statistical data is taken from Committee for Statistics of RF, Property Ministry of RF, Russian Federal Property Fund and their Nizhny Novgorod Regional Agencies.


EVOLUTION AND TRANSPLANTATION OF HOUSING FINANCE INSTITUTIONS
Oleg Starkov
Central Economics and Mathematics Institute, Moscow

Reforming of transition economies is based on the transplantation of institutions which proved one’s efficiency in the developed countries. Rationality of transplantation consists in acceleration of national effective institution development. In practice some of institutional transplants fail or form ineffective stable norms (institutional traps) but some of them demonstrate positive adaptation and provide economic growth in recipient countries. So the main problem proposed by Victor M. Polterovich is to examine principles of transplants selection. Which transplantation strategy minimizes costs of creating effective institutions: the most development acceleration by grafting present-day models from leading economic systems (shock transplantation strategy) or start with intermediate stages observed in the evolution of a donor-country institution (gradual transplantation strategy)? To choose the appropriate starting transplant we must study alternative institutional forms and systems in different countries and moreover their evolution.

In my research I try to examine the problem of transplantation upon evolution patterns of housing finance institutions (HFIs). HFI include two specialized institutions: saving-and-credit bank and mortgage bank. Each of them passed through three stages of evolution. I analyze 89 cases of HFI`s origins in 54 countries over a period of 200 years.

Firstly I propose a general scheme of HFI evolution. Secondly I argue that HFIs propagate in the world by means of transplantation than by spontaneous origination (natural selection). Thirdly using empirical data I proof Polterovich`s hypothesis of an acceleration and structural analogy of institutional transplant’s evolution. Using dates of stage by stage transformation of transplants I demonstrate how much time a recipient country managed to shorten in comparison with evolution period of a donor institution. If fundamental structure of donor and recipient institutional environments and cultures as well as their history paths are close enough then transplant’s transformation repeats effective evolution patterns of a donor institution and fits domestic environment. Fourthly if a gap in the development of a donor and recipient is large then gradual transplantation strategy is more effective then shock one.

But how can we measure this gap and estimate the probability of positive transplantation? How can we measure costs of transplantation? Can we compare efficiency of transplantation projects? These questions need further research.


INSTITUTIONAL CONSTRAINTS TO THE FORMATION OF LABOR MARKETS IN LESS DEVELOPED ECONOMIES
Regulagadda Vijay
University of Hyderabad

Rural markets are known to be incompletely formed in less developed economies. Discussions in literature highlight predominance of lease transaction in land market transactions, multiple forms of contract in labor markets and lack of well-developed output markets for purchase of food grains. Explanations for these features are based on a combination of uncertainty, and contract formation under asymmetric information within the market framework. This proposal presents the findings of a survey on village labor market and tries to advance a search-based transaction cost explanation as an constraints to the complete formation of labor market. This survey, conducted in Andhra Pradesh (a state in India), brought out two features of the labor market:
     1. Agricultural labor households enter either casual labor market to earn
         income or lease-in land from a landowner and use family resources to
         produce food crops.
     2. The reasons quoted for preference of a lease contract are
               · Cultivating food grains on this land eliminated their dependence
                  on the market for purchase of foodgrain.
               · Dependence on the labor market for employment too was
                  eliminated.
The above suggests that the agent has two choices to meet his consumption needs. In one case, the household enters the casual labor market and earns a wage income, which is used to purchase the consumption bundle from the output market. In the second case the household enters the lease market to lease in land and cultivates food crops. The two choices have different transaction costs. Here we would consider only search based transaction costs. In the first case the household has to search for an employer, negotiate terms of contract, and given asymmetric information about his attributes, reveal his attributes to the employer. Further, the household has to identify a seller for foodgrain, negotiate a price as well as quality of the good. Thus there are search costs related to both markets as well as costs related to uncertainty: unemployment related uncertainty in the labor market and uncertainty regarding price and quality of goods in the output market. In the alternative scenario, the search-based transaction cost relates to finding a lessor, quality of land, form of contract, and rental rates. Here uncertainty is mainly related to nature. The present exercise is an attempt to model constraints to the complete formation of labor market given these options for the agents.


THE POLITICAL ECONOMY OF PENSION REFORM:
INSTITUTIONS AND VETO PLAYERS
Mario Villarreal-Diaz
School of Politics and Economics, Claremont Graduate University

Previous research focused on demographic and economic variables in explaining the necessity and the timing of pensions reform. More contemporaneous work, mainly based in formal theoretical models, recognizes and explores the importance of the political process. Most all of these contributions are right but also incomplete and is evident the lack of empirical work. This paper explores how political institutions affect the probability and type of pension system reform. Preliminary findings derived from an econometric analysis of a panel of 65 countries for a time span from 1975 to 2000 suggest the existence of a “policy feedback” and a wealth effects. Relative higher social security expenditures reduce the probability of reform while relative higher GDP per capita levels increases it. On the other hand, the growth on the elder population has negative effect on the same probability, suggesting the elders are an important pressure group that may prevent reform. With respect to the effects of the political variables, more democratic regimes are less likely to reform their pension system. It seems to be the case that when a country facilitates the expression of different voices and actors, changes in the status quo are harder to achieve. The level of political constrains in not significant. However, an interaction effect suggests that the joint existence of institutions that allow the expression of heterogeneous preferences and a higher number of veto players increases the likelihood of reform.