The objective of this doctoral thesis is to analyze, from a Law and Economics perspective, the role of professional testimonial privileges in the efficient functioning of lawyers, auditors and reporters in corporate compliance in capital markets. The thesis consists of three parts.

The first concerns lawyers. The analysis employs existing models of lawyer-clients privilege and extends them to incorporate the corporate principal-agent problem. Behavioral and empirical insights are used to strengthen the observation that the corporate lawyer’s privilege is not as socially beneficial as claimed. It is postulated that unbundling the corporate legal services of ex-ante legal advice and ex-post legal advice (litigation advice) and granting the privilege only to ex-post legal monitoring services will reduce social loss caused by the privilege when it protects communications that would have occurred without it.

In the second part, behavioural insights are used in order to suggest that auditors, who generally enjoy no privilege, could improve their gate-keeping and whistle-blowing functions if supported by an absolute privilege to protect confidential sources within their audited-clients.

Finally, a model of the source-journalist interaction is developed to demonstrate the effect of reporters’ privilege on the flow of information from corporate-insiders to the public. Since corporations can invest in ex-ante monitoring for leaks or in ex-post litigation against leakers, upholding the reporter’s privilege by courts does not necessarily increase the flow of information to the media but it can affect the value of the leaked information. Cases of corporate litigation against journalists are analyzed to assess the social cost of this privilege.


TENURE INSECURITY, TRANSACTION COSTS IN THE LAND LEASE MARKET,
AND THEIR IMPLICATIONS FOR GENDERED PRODUCTIVITY DIFFERENTIALS
Mintewab Bezabih
Göteborg University

The paper deals with the impact of tenure insecurity and transaction costs on land leasing behavior of Ethiopian farmers. We hypothesize that heterogeneities with respect to tenure security and ability to enforce the terms of contract lead to differing intensity of leasing out between female and male landlords. Lack of recognition of female family heads as farmers might lead to tenure insecurity, and as a response to it, to a high tenant turnover. Similarly, compared to male landlords, female landlords might find it more difficult to enforce optimal level of effort from the tenant and to protect their land from being mismanaged. As a result, they might go for other suboptimal labor arrangements which would lead to systematically lower productivity of female plots.


PRICING UNDER ASYMMETRICAL INFORMATION:
A CASE STUDY OF HONG KONG’S HOUSING MARKET
Lennon H.T. Choy
Hong Kong Polytechnic University

The housing market in Hong Kong is characterized by the existence of asymmetrical information in the primary and secondary markets.  Apartments sold in the primary markets are usually “uncompleted” units, hence inspection of property would not be arranged to the prospective buyers normally.  On the contrary, buyers in the secondary market can inspect the properties and obtain rather extensive information from the public sources.  Generally speaking, the sellers vis-à-vis the buyers in the primary market possess more information than the situation in the secondary market.

This study attempts to investigate whether the housing developers can take advantage on the asymmetrical information in their pricing strategies? If they can do so, the housing market is said to be inefficient according to Fama (1970)’s weak form test. This study proposes a pooled cross-sectional analysis on selected housing developments in Hong Kong so as to testify if there exists any structural change of value on various housing attributes (e.g. size, floor level and views etc.) over the primary and secondary housing markets. 

The null hypothesis of no significant change on hedonic price parameters over the primary and secondary markets, however, is being rejected in an empirical study.  The study found that instead of exercising “overpricing” strategy, the housing developer had persistently “underpriced” some housing attributes. Typically, these attributes are with inferior qualities but had yet made known to the general public. To explain this pricing behavior, a detailed investigation on the underlying institutional arrangements has been carried out.  This study suggests that the housing developer had “voluntarily” underpriced the inferior housing attribute so as to discharge some her legal obligations at the margin.  On the other hand, the marginal buyer is also “willing” to let go his rights to sue the developers by pocketing the profit he could make in the secondary market.  In equilibrium, the housing attribute should be underpriced so as to equate the housing developer’s marginal saving in litigation and compensation costs to the marginal gain of the first hand buyers who sell their apartments in the secondary market shortly after the first sale. The findings of this study can be generalized to explain the underpricing behaviors of public companies during the IPO exercises.


HOW CAN CORPORATE SOCIAL RESPONSIBILITY AFFECT DEVELOPMENT?
Athanasios G. Chymis
University of Missouri-Columbia
 
The purpose of this study is to examine one method businesses affect development: corporate social responsibility (CSR).  Can CSR be a method of promoting economic development?  If so, how, and why?  This study will consist of three essays.
 
The first essay will use NIE to reconcile opposing views of Friedman and advocates of CSR.  The essay will show that the differences between Milton Friedman and CSR advocates stem from different assumptions the two sides make about market.  I will show how NIE can inform the debate because of its emphasis on realism of assumptions, as argued by Coase.
 
The second essay will use the KLD index for CSR and the Herfindahl index for market structure to examine empirically the relationship between market structure and socially responsible actions of firms.  Firms in competitive industries might have an incentive to engage in CSR as a signaling device, but they will be constrained by normal profits.  Firms in highly concentrated industries will not have an incentive to engage CSR either, although, ironically, they may have the financial resources to do so.  If we imagine a continuum between perfect monopoly and perfect competition I would expect a maximum of socially responsible behavior (ceteris paribus) somewhere in the middle.
 
The third essay will model the impact of CSR on development through two paths.  The first path is direct, through profit maximization, while the second path is indirect, through the building of trust to lower transaction costs.  It is not clear what the direct impact ought to be; Friedman would argue that the impact is negative because it reduces firm’s profits whereas CSR supporters would argue the opposite.  If the direct impact is negative it can be in part outweigh from the positive indirect impact.  However, in light of the first and second essays I will be able to make a case for a positive direct impact under conditions.  The indirect effect, however, is expected to be positive.  CSR can be shown to affect social capital (trust), which will in turn have a positive impact on development.


ECONOMIC GROWTH, INSTITUTIONS AND MARKETS:
THE CASE OF TRANSITIONAL COUNTRIES
Pál Czeglédi
University of Debrecen

My research question is how competition affects economic growth through institutional change in transitional countries. Although it is widely recognized that fundamental institutions like property rights, the rule of law, and even beliefs and norms affect economic development, we know less about the relationship between economic growth and micro institutions. One can argue that given the fundamental institutions enforced by the state, the parties will find the most efficient contracting institutions. At the same time, New Growth Theory has shown that the level of competition has an effect on growth rate and that effect is ambivalent. But this theory does not pay attention to the change of institutions.

My hypothesis is that economic growth rate is affected by the change of contractual institutions, but it is competition that enforces that change. I will argue that competition affects economic growth indirectly through institutional innovation and imitation. This latter is probably more important in transitional countries.

To investigate this question empirically, I have to begin with the definition of the level of competition which can be interpreted in a changing environment. This is why, I will argue, the level of competition should be defined here as freedom to contract. As this is the notion on which the Economic Freedom of the World Index is based, I will examine the effect of competition on economic growth by running regressions between this index and the GDP growth data of transitional countries. By the help of this analysis one can answer the question, whether the effects of competition in transitional countries differs from that in the other countries. This analysis will also focus on the components of the index mentioned above, because the components can be interpreted as levels of the institutional mix. Using this index also makes it possible to differentiate between the effects of fundamental institutions like property rights and the level of competition. This quantitative analysis should be complemented by some comparative research concerning how institutions change in countries with different levels of competition.


DRIVING FORCES FOR UNWANTED REFORMS: THE CASE OF UKRAINE
Vladimir Dubrovskiy, Janusz Szyrmer, William Graves III, and Sergey Kokovin
CASE Ukraine

We develop the multi-agent “arbiter-clients” model to explain how societal and technological progress can result in the contraction of rent seeking through economic reforms even in a rent-seeking society; and use it to explain the course of events in Ukraine since 1950s, including escape from the type of “partial reform” equilibrium described by Sonin (2003), and Hoff and Stiglitz (2002, 2004).

We consider a two-sector economy, where the rent-seeking sector initially prevails over the value-adding one.  In the rent-seeking sector, an arbiter (a ruler, an Olson’s “stationary bandit”) can compensate for weak property rights and weak social capital, and prevent the overappropriation of rent (“overfishing”) by using his discretionary power to coordinate the rent-extracting agents. That same power allows him either to extort rent from them, or to buy their loyalty, thus making them his clients. Unless the people restrain the arbiter’s power, he expands the rent-seeking sector, primarily by protecting the monopoly rents. In turn, under the prevailing regime of rent seeking the people tend to treat any non-primitive economic activities as a “zero-sum game,” thus SUPPORTING the arbiter’s redistribution activities.

However, the cost of control and coordination of the rent-seeking sector limits its size. A power-maximizing (totalitarian) arbiter should earn enough rent to cover this cost. A rent-maximizing (authoritarian) arbiter further optimizes his scope of control for reasons similar to Coase’s theory of the firm. Thus, the problems of principal-agent relationships and optimal allocation set natural limits to the proliferation of rent seeking.
 
Furthermore, such costs tend to increase with time due to long-term factors (like technological progress) that are mostly exogenous to the model. This increases the principal-agent difficulty, and complicates the coordination. If the arbiter’s rent does not increase correspondingly, he has to downsize the rent-seeking sector, most often in response to some threat or crises; and enhance the efficiency of the value-adding sector as an ultimate source of rent.

In this way the market institutions may proliferate although no major politically represented social group is interested in them. However, when the rent-seeking sector contracts enough, public choice eventually takes force in support of market institutions.


THE IMPACT OF WOMEN’S SCHOOLING ON PROPERTY RIGHTS
AND DECISION-MAKING WITHIN THE HOUSEHOLD:
EVIDENCE FROM A NATURAL EXPERIMENT IN SUDAN
Buthaina Elnaiem
Juba University

Girls’ access to schooling varies across regions of Northern Sudan.  In some cases differential access of today goes back to choices made by British colonial administrators. Since female illiteracy remains high in many areas today, this historical circumstance provides a natural experiment to examine the long-term impact of female access to schooling on institutional features, including decision-making and property rights within the household.

This topic is important because our knowledge concerning how the education of women changes the rules of the game is limited, especially so in strong and deeply rooted traditions like that of the Arabic-Islamic culture of Northern Sudan.

The paper documents the differential historical patterns of female education in two selected areas with similar cultural and institutional background features except for the differential availability of girls’ schooling. It selects samples of 125 women of ages 25-50 and 15 older women (above age 60) in each geographical area, addresses issues of sample selection bias, describes the survey instrument and survey technique, and analyzes survey data for systematic differences in the intra-family property rights and decision-making authority across these two areas. Changes over the 25-year cohort will also be examined. The concepts and techniques of new institutional economics and a combination of qualitative, quantitative and case study methods will be used for this analysis.


THE EFFECTS OF POLITICAL COMPETITION
ON HORIZONTAL ACCOUNTABILITY:
THE CASE OF THE INDEPENDENT COURTS OF ACCOUNTS IN BRAZIL
Carlos Figueirêdo
Federal University of Pernambuco

What are the factors that explain the great variance in the effectiveness of the control exercised by the 33 state level Tribunais de Contas (“courts of accounts”) in Brazil? Current explanations of the effectiveness of horizontal accountability involving independent control institutions give great emphasis on such factors as professionalism, political insulation, patterns of recruitment, and the role of the media and civil society. This paper explores a connection that has been rarely tested in the literature: the role played by political competition. In states where political competition is more intense, control institutions perform better. The paper tests the hypothesis that this is the key explanatory factor. Current explanations of control institutions face a formidable methodological problem: the effectiveness of their actions cannot be analyzed with reference to the number of frauds they report, because this would underestimate their deterrence impact. By suggesting innovative methodologies to bypass this problem, the paper also makes an important contribution for the analysis of these institutions. The paper draws on original survey data on the 33 institutions and reports the results of an ordered logit statistical test which gives support to the hypothesis that competition is a key explanatory variable.


POLITICAL HORIZONS AND CORRUPTION
Mario Gamboa-Cavazos
Harvard University

We study how corruption that occurs between the State and the private sector is organized. By exploiting differences in the political and industrial organization across states in Mexico, we explore how party permanency and industry structure determine the extent of corruption. Using micro-level data on extra-official payments made by firms, we find that the political clout exerted on a state government affects corruption in a non-linear manner. Specifically, corruption is higher for high and low levels of party permanency, and lower for intermediate levels. Moreover, we also find that firms that accrue more rents are those willing to pay more bribes, except when permanency seems unlikely.

We relate these findings to a combination of horizon and capture effects. In the first, politicians have incentives to prey more intensively on firms as their window of opportunity shortens. In the second, entrepreneurs have incentives to bribe government officials over long and “feasible” policy horizons, indicating firms’ long-term vision when buying out politicians. Finally, we also find an important rent effect, where firms endowed with larger rents are more likely to corrupt officials in exchange for economic shelter.


MEASURING THE TRANSACTION SECTOR IN THE POLISH ECONOMY,
1996 – 2002
Patrycja Graca
Warsaw School of Economics

This paper forms a part of a larger research project on the transaction costs in the transition economies that I do together with Professor A. Sulejewicz at our Department and which is financed by KBN (the Polish Ministry for Science). The paper was presented this year at the BASEES Conference in Cambridge.

The article of Wallis and North (1988) is one attempt to provide a measure of transaction costs in the national economy. Their attempt is to define “transaction sectors” and relate the levels of output (i.e. costs incurred) in such sectors to the level of gross national / domestic product. Apart from the original research concerning the US, there have been very few studies describing other economies (e.g. Australia, Argentina). The paper joins the discussion on macroeconomic interpretation of transaction costs started by Wallis and North. While we had hoped to trace the evolution of the transaction sectors as well as the pattern of transaction activities in non-transaction sectors as defined above, the availability of data prevented us from accomplishing ambitious research tasks. This paper is basically a replication of the study Wallis and North did for the US and B. Dollery and Leong did for Australia albeit for a much shorter time span (seven years). It contains a short description of the methodology used by these authors, the application of the method to the data on the Polish economy in the 1990s and 2000s. We compare the findings with Wallis and North, Dollery and Leong and provide some preliminary interpretation of the results.


NEW INSTITUTIONAL ECONOMICS AND THE SOCIAL COSTS OF
DOMESTIC VIOLENCE LEGISLATION IN PUERTO RICO
Paco Guerra
Catholic University of Puerto Rico

The Commonwealth of Puerto Rico was one of the first countries in the world to enact a comprehensive “domestic violence” law two decades ago.  This law, enacted in August of 1989, is referred to in Spanish as “Ley 54”, or Law 54.  In summary, Law 54 broadly defines what acts constitute domestic violence and authorizes the courts to issue protective orders to victims of domestic violence.  Moreover, Law 54 commits the Commonwealth to reduce domestic violence as a matter of public policy.  Nevertheless, despite the existence of this law and the creation of new institutions to implement the law (specialized family courts, police units, and the Puerto Rico Commission on the Status of Women), preliminary empirical studies show that the amount of reported domestic violence disputes under Law 54 continues to increase two decades after the law was passed. 

Law 54 thus raises a number of questions that can be analyzed under the new institutional economics.  First, if legislation is seen as the result of competing rent-seeking interest groups, how are we to explain the passage of a law like Law 54?  Second, if Law 54 led to the creation of new institutions to deal with the problem of domestic violence, why hasn’t the rate of domestic violence started to decline or level off yet?  Third, to what extent is the increase in domestic violence the result of “strategic behavior”; that is, to what extent do “victims” (both men and women) use the provisions of Law 54 strategically to preemptively obtain child-custody rights or to impose non-market costs on spouses they suspect of infidelity?  Fourth, is there an “optimal” number of domestic violence disputes; that is, is a certain number of domestic violence cases, like car accidents, unavoidable under any legal system?  And last, what then is the appropriate institutional response to the problem of domestic violence?

I shall attempt to answer these questions using the framework of the new institutional economics.  I will have completed my data collection and my preliminary findings prior to the workshop in September of 2005.


THE ENTREPRENEURIAL THEORY OF THE FIRM
Jian-qiang Jiang
Fudan University

The paper attempts to provide some rationale for the existence of the Schumpeterian entrepreneur in the theory of the firm.

Within the last few decades, the theory of the firm has become one of the fastest growing areas in applied microeconomics. And yet, surprisingly, we can find the Schumpeterian entrepreneur everywhere in the real world except in the modern theory of the firm. Usually, the “entrepreneur” has been understood as the one to coordinate the production in order to save transaction costs, to avoid shirking behavior by monitoring, or to secure the ownership of the relevant assets to reduce opportunism through integration. Thus, questions remain as to how and why the entrepreneur-innovator suggested by Schumpeter was neglected by the theory of the firm.

Basically, the theory of the firm is rested upon either of the two assumptions: the product space is given, and the transaction costs of intangible idea of product innovation are trivial. If it is the former in question, the product innovation activities cannot be explained theoretically. If it is the latter, then all Coasian firms can buy any intangible ideas of product innovation from the open market. Although the dynamic characteristics of product space can be explained, the Schumpeterian entrepreneur is ignored and left unexplained. Because the owner of innovative ideas does not need to establish or go into a firm to appropriate his rents, alternatively, he can profit from selling the idea directly to the Coasian firm.

In the real world, however, transacting intangible knowledge is more difficult and costly than any other tangible goods. Based upon the transaction cost approach, it seems to be economical to forgo any direct pricing of this intangible knowledge as an input, and to price its tangible output instead. That means the innovator can appropriate his rent by building a firm and selling his new product to the market if selling the idea is too costly. In this sense, the firm can be interpreted as an indirect pricing mechanism of intangible knowledge, and thus the role of Schumpeterian entrepreneur is justified in the theory of the firm.


SOVEREIGN RISK: CONSTITUTIONS RULE
Emanuel Kohlscheen
University of Warwick

This paper models the executive's choice whether to reschedule external debt as the outcome of an intra-governmental negotiation process. The executive's necessity of a confidence vote from the legislature is found to provide the rationale for why some democracies may not renegotiate their foreign obligations.

Empirically, based on a sample of 59 developing countries with access to private capital markets, I find that parliamentary democracies are indeed less prone to reschedule their foreign liabilities and accumulate arrears on them and only parliamentary democracies have been able to significantly reduce their debt/GNP ratio without a 'credit incident'. The effect of a Constitutional requirement of confidence on the executive is statistically and economically significant: it is equivalent to an increase in reserve holdings sufficient to finance eight months of imports. Moreover, countries with stronger political checks on the executive and lower executive turnover have a lower rescheduling propensity. The results persist if Latin American countries are excluded from the sample.

These results suggest that North and Weingast’s account of the evolution of institutions in 17^th century England gives substantial mileage in understanding the international debt markets in the contemporaneous developing world.