Ronald Coase Institute: 2006 Boulder Workshop, Abstracts

2006 Boulder Workshop: Abstracts

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WORKSHOP ON INSTITUTIONAL ANALYSIS
SEPTEMBER 16–21, 2006
BOULDER, COLORADO, USA

ABSTRACTS
Clicking a link will scroll the page to the relevant section:
|Boudreau|de Almeida|Dorj|Ferrão|Ghazanchian|Jang|Jowitt|
|Kim|Kowalska|Mijiyawa|Mondelli|Nóbrega|Paneyakh|Quiroz|
|Ribeiro|Rodriguez|Shiferaw|Singh|Stamer|Tang|

THE BOUNDARIES OF THE PLATFORM
Kevin Boudreau
Massachusetts Institute of Technology

"Systems" are products made up of multiple elements or components that work together (Katz and Shapiro 1994). The subset of a system used in common across multiple products is a "platform." Typical examples of platforms include computer operating systems, the frame/suspension/drive-train used in automobiles; electronic trading networks, and bottleneck telecommunications facilities. Systems research most often begins with assumptions of which components are part of the platform and which are not – and proceeds to study strategic interactions and contracting around platforms (Schmalensee 2002; Rochet and Tirole 2005).

This paper presents especially discerning measures of platform boundaries in multiple mobile computing¹ platforms, over time and over the entire mobile computing "stack" to systematically document considerable variation in boundaries and to explain underlying strategic incentives for these changes. The analysis draws on multiple primary and secondary data sources, including market data, product data, and executive interviews and presents the histories of five leading platforms in descriptive detail.

The simple descriptive facts are themselves noteworthy. Boundaries of the platform suppliers changed regularly. Boundaries were sometimes "wide," other times "thin;" sometimes expanding; other times contracting. Further, rather than "entering" into component businesses, platform suppliers more frequently "edged" into or out of control of particular component businesses. And though there was a clear correspondence between technical boundaries of platforms and economic boundaries of platform suppliers, these were not precisely the same.

Shifting boundaries could be broadly understood in terms of three main goals of platform suppliers. First, narrowing boundaries often promoted network effects and "external innovation" by outside firms. Second, expanding boundaries facilitated "integrated innovation," especially in the early development of systems where tightly coordinated, global design approaches were required. Third, wider boundaries and more concentrated control, more generally, helped platform suppliers maintain greater appropriability over systems. Tensions between these interests led platform suppliers to alter their strategies over the industry life-cycle and over different components.

¹The analysis focuses on Palm, Windows CE, Symbian, EPOC, Mobilinux, but also makes contrasts with seven other mobile platforms.

CREDIT AND INSTITUTIONAL ENVIRONMENT:
COMPARING CREDIT CONTRACTS FOR AGRICULTURAL PRODUCTION
IN BRAZIL AND IN THE USA
Luciana Florêncio de Almeida
University of São Paulo

The Brazilian agrifood sector has experienced substantial export-led growth since the mid-1990’s, with notable contribution from the soy complex. Therefore Brazil still has some relevant limitations for its national agribusiness agenda, and according to Chaddad and Jank (2006) the volatility of macroeconomic policies, which includes high interest rates and over-valuation of the real exchange rate, is among the most relevant ones. Through research applied to Brazilian soy producers, Zylbersztajn et al (2005) identified some institutional constraints relative to the credit contracts:
a) collateral registration constraints, b) lack of farm insurance market, and c) judicial failures that support the farmers’ relationships. As a consequence, farmers face critical problems to finance their assets.

This institutional scenario motivates this research concerning two main questions:
1) What are the main idiosyncrasies of the institutional environment for the farm credit contract?
2) How may the transaction costs affect the farmer credit contract arrangements for financing soy production?

Other studies indicate a strong interaction between the institutional environment and the private credit market (La Porta et al 1998; de Soto 2001; Pinheiro and Cabral 1998; Djankov et al 2004). In the agricultural economics field, Chaddad and Lazzarini (2004) pointed out some “frictions” that result in transaction costs for contracting credit: costs of information, ex ante costs (bargaining, safeguards and incentives) and ex post costs (monitoring contracts and contractual maladaptation).

In evaluating the institutional environment for both Brazilian and American rural credit markets, this research seeks to identify the main transaction costs associated with the credit contracts for financing soy production. It’s expected the research will bring some light on the relationship between the institutional framework and the existence of specific types of credit contracts arrangements. It also aims to suggest institutional changes, in order to reduce the frictions and guarantee the feasible efficiency for both sides of the transaction. Through a methodology that combines qualitative approaches (case studies) and quantitative approaches (surveys), this research plans to capture both sides of the transaction point of view: lenders and borrowers. Prior empirical studies to identify transaction costs (Benham and Benham 2001; Zylbersztajn and Graça 2002; Chaddad and Lazzarini 2003) will serve as a reference in evaluating the transaction costs.

COMMON POOL RESOURCE WITH FREE MOBILITY:
“VOTING WITH THEIR HERDS”
Dolgorsuren Dorj
University of Hawaii at Manoa

This paper explores the importance of institutions and enforcement mechanisms such as sanctioning that occur in a community-based property regime in response to the common pool resource (CPR) problem present in Mongolian pasture. Previous CPR literature suggests that sanctioning mechanisms prevent overexploitation of the community resource. The existing literature focuses on a one-locality CPR problem.

This work considers multiple localities to capture essential aspects of traditional (mobile) extensive grazing. We study how free mobility affects the CPR problem. We study the effects of the different institutions on the spatial distribution of herders in a two-community economy. Each herder chooses the locality in which he wants to reside and appropriate resources. We ask whether a sanctioning system can survive when free mobility allows individuals to choose between communities that differ by the institutions governing them.

In our theoretical study we obtain the following results: (i) when both pastures are unregulated, a unique equilibrium always exists in which a homogenous population is divided equally between two localities and both pastures are overgrazed; (ii) under a sanctioning system, herders reside in both localities, the population in each community is of an equal size, and there is no overgrazing; (iii) under a sanctioning mechanism in one locality and unregulated pasture in the second locality, the equilibrium yields more herders in the locality with the sanctioning system, because sanctions prevent overgrazing; this migration process improves the appropriation efficiency in unregulated pastures; (iv) when the choice of institutions is endogenous, the outcome depends on the monitoring cost structure.

To test the predictions of our model, we conduct experiments that carefully distinguish between different institutions and free mobility conditions. We find that with costless migration, subjects prefer a sanctioning system over unregulated pastures. Despite a costly monitoring decision, subjects monitor each other due to revenue-generating device; the appropriation is smaller when the benefits of sanctions outweigh the monitoring costs.

DO BRAZILIAN JUDGES FAVOR THE WEAKER PARTY?
Brisa Ferrão
University of São Paulo

The most intense debate regarding the consequences of judicial reform in Brazil is concerned with the hypothesis laid out by Pérsio Arida, André Lara-Resende, and Edmar Bacha (2005) regarding “jurisdictional uncertainty.” According to them the litigation of contracts in Brazil’s judiciary leads to considerable uncertainty, and the courts frequently display an anti-saver and anti-creditor bias.

Some opinion surveys have attempted to confirm this bias. The depth of this bias, they say, may be inferred in Brazil from the answers to an elite opinion survey conducted by two Brazilian political scientists (Lamounier, Souza, 2002). Confronted with the dilemma between the enforcement of contracts and the practice of social justice, only 48% of the 500-plus respondents considered that contracts have always to prevail over social considerations. Only 7% of the members of the judiciary said that they were prepared to judge contracts independently of social considerations, and a full 61% acknowledged that the achievement of social justice would justify decisions in breach of contracts. It is to be stressed, however, that these surveys ask what these judges are likely to do, not what they actually do.

These studies appear to lie in some “faulty” beliefs (North 2005). Instead of checking how judges decide the cases, they just ask how they would decide, which is far from an objective criterion. Several studies were devoted to the analysis of the gap between declared intentions and the real actions (Glaeser et al 2000, among others).

This project goes deep into the analysis of judicial decisions, instead of relying on opinion surveys, to verify the existence of an anti-creditor bias. The paper shows that a contract has 45% more chance of being maintained if it is beneficial to the richer party, even when we take into account the merits of the case. The judiciary disregards the contract only in areas where legislation explicitly protects the weaker party (labor contracts, social security, and environment), but to a much lower degree. In areas identified as being sensitive to economic development, such as financial contracts, commercial transactions, and landlord-tenant relations, judges typically do not interfere.

INFLATION TARGETING IN ARMENIA:
"MONEY" OR INSTITUTIONAL FRAMEWORK?
Manuk Ghazanchian
American University

It has been over 10 years since Armenia first announced its national currency, and monetary policy took its own course in a newly independent country. In recent years, Armenia’s economy was growing at high rates – with 5-year average rate of nearly 12%, which was consistently higher than the average growth rate within countries in CIS. These superior achievements in economic growth were coupled with a stable macroeconomic environment and low inflation.

In the year 2005, the Central Bank of Armenia switched its policy regime from monetary targeting to inflation targeting. What was the reason behind such a policy shift? Was there a belief that discretionary actions were not as influential as policy rules? Had a decent institutional framework been already developed that could be utilized in creating a credible “contract” with the public? This paper shows that from 1995 to 2005 monetary policy was highly effective in Armenia both for output and prices. Having said this, it is the Central Bank’s positive institutional development route and increasingly significant role in the economy and macroeconomic arrangements that should be given the highest score for the above result. Under these circumstances, switching to inflation targeting was not only desirable for Armenia but also was highly expedient for the sake of smooth monetary policy conduct. Hence high-credibility policy regime, inflation targeting, in particular, is favorable compared to discretionary independent monetary policy for the case of Armenia.

The major obstacle for successful targeting, however, is the concurrent observation that no instrument has been individually strong in affecting output and prices except the exchange rate, which was highly Granger-effective for prices in the short run. The implications for this result are twofold. First, a well-understood transmission mechanism is still not present in the hands of monetary authorities. Second, on an individual basis, nominal shocks are absorbed effectively only by the exchange rate, and hence monetary authorities should keep an eye on its excessive fluctuations. Money does not matter for Armenia, but monetary policy with a flavor of instruments does. The latter result suggests further inquiry into institutional aspects of the achieved stability.

ORGANIZATIONAL CHOICE MECHANISM IN THE U.S. PORK INDUSTRY
Jong-Ick Jang
University of Missouri

The firm boundary or governance structure issue has been explored since Ronald Coase wrote his seminal 1937 paper. While transaction cost theory of the firm mainly elaborates contractual hazard arising from holdup based upon relationship-specific investment and uncertainty, agency theory and incentive-system theory of the firm focus on agents’ free-riding behaviors under certain monitoring costs and an agent’s contractual externalities under multi-task and measurement difficulty setting, respectively. Each of the three theories of the firm argues that they provide the most consistent explanation for the existence and boundary of the firm. However, all three theories of the firm are relevant to comprehensively understand factors affecting a firm’s make-or-buy decision of a critical component within a given industry such as the U.S. pork industry.

This research revisits the firm boundary issue and combines together the way each of the three theories of the firm explains pork packers’ behaviors regarding the exchange of slaughter hogs in the industry. This exchange has experienced dramatic changes in organizational forms since the early 1990’s, transitioning from spot market to contracts to vertical integration. This paper identifies the characteristics of the pork industry, like asset specificities, measurement costs of goods sequentially transformed, and increasing horizontal integration in hog production sector, that indirectly influence the costs of both market contracting and internal organization. It also analyzes the relative competencies and costs of alternative organizational forms concurrently adopted for exchange of slaughter hogs: spot market, marketing contract, production contract, and vertical integration. It then generates three sets of testable hypotheses, each set related to one of the three theories of the firm: (1) asset specificities and contractual hazard; (2) multi-task, measurement difficulty, and contractual externality; (3) brand name capital, multi-agent, and value chain externality. Finally the paper attempts to empirically test the hypotheses by using 2002 microanalytic data originated from USDA AMS and GIPSA and USDC Economic Census.

THE IMPACT OF EMPLOYMENT REGULATION
ON EMPLOYERS’ STAFFING DECISIONS IN VANUATU
Anita Jowitt
University of the South Pacific

Vanuatu is a developing country in the South Pacific. It gained independence in 1980 and maintains a legal system based on a combination of English common law and customary law. As with many developing countries, it is facing issues related to rapid population growth and a small and slowly expanding labour market. There is currently very little existing data about or commentary on labour markets in Vanuatu, and no published research on the interaction between law and business decisions.

This research project examines how Vanuatu’s employment laws affect private sector employers, and involves empirical research. The project began by examining the “standard neoclassical economics” hypothesis that regulation which increases labour costs leads to less people being employed. As the data was analysed, it became apparent that the hypothesis rested on the flawed assumption that employers regularly use or follow the law. Instead, the data indicates that the relationship between law and business practices is not overly significant in regulating business practices, and instead a more complex system of social norms and networks operates.

The analysis of data draws together research and theory from legal sociology, new institutional economics, and legal anthropology. It also contributes to the debate about the place of law in post-colonial societies and the nature of legal pluralism.

INTERNATIONAL INSTITUTIONS AND THE CONDITIONS OF CHANGE
IN STATE PREFERENCES: THE CASE OF REGIONAL INTEGRATION
Min-hyung Kim
University of Washington

This paper seeks to specify the conditions under which international institutions change member states’ preferences in international bargaining. The main goal is to theorize the “feedback loop”—the influence of international institutions on the changes of state preferences.

To show how international institutions change member states’ preferences, this paper focuses on regional integration schemes (i.e., the EU, NAFTA, and ASEAN). I employ historical institutionalism to explain the role of international institutions in changing state preferences. The main focus of historical institutionalism lies in the ways prior institutional commitments condition future action, limit the scope of what is possible, and cause agents (states) to redefine their interests (Pierson 1996). Since the structure of institutions affects agents’ chances for political success by determining what and whether demands are put forth in the first place, the institutional context shapes not just the strategies but the underlying preferences of actors (Crystal 2003; Thelen and Steinmo 1992). Thus it is unreasonable to talk about the preferences of states in the vacuum of institutional contexts.

Following the historical institutional approach, I argue that while states choose international institutions, institutions evolve and change over time and gradually constrain the choices of states, ultimately leading to reshaping of the preferences of states. In other words, states are careful to choose a regional integration scheme (which best suits their goals and bring benefits that outweigh the costs of membership) in the first place and try to increase their leverage by controlling the depth of regional integration but, over time, regional institutions evolve and reshape the preferences of states by generating increasing returns by way of “elite learning.”
What is critical for elite learning, however, is the positive feedback from participating in regional integration efforts. The absence of positive feedback from membership of a regional integration scheme brings about “simple learning,” which leads to strategy change—as opposed to preference change—of states, resulting in the slowdown of integration. This process underscores the feedback loops, over time, between day-to-day politics and institutional choices in which the capacity of supranational institutions to provide elite learning affects the preferences of domestic actors.

HOW TO DESIGN A PATH OF INSTITUTIONAL CHANGE
TOWARDS MANAGED HEALTH CARE SYSTEM IN POLAND?
Katarzyna Kowalska
Warsaw University

For more than 40 years, Polish health care sector structures were totally integrated. After 1999 the system moved ultimately from the integrated model of provision towards separating public “third party payers” from health service providers. We know from international experience and institutional theory that there are plenty of ways of organizing exchange relationships between such contractual parties.

This research project is a continuation of my PhD study on the causal nexus between type of contract (financing rules) and cost/quality effectiveness of the activities taken up by primary and secondary health care organizations in Poland. I had an opportunity to monitor organizational pilots (using as a blueprint some world-wide known managed care arrangements). Using my case study results, I argued that capitation prospective payment for wide packages of health care and delegation of financial responsibility and risk management from the payer to the medical service providers created incentives to cost and quality monitoring and encouraged spontaneous (bottom-up) vertical integration between primary and secondary care providers.

Even though the pilots seemed to be a more cost and quality effective way of organizing the health care process, the experiment fell to the ground. The main conclusion that emerges after penetrating analysis of that undertaking states that we cannot expect managed care regulations to be introduced in any country once and forever only through a change in formal regulations, without including the specific local context of that change and without preparing beforehand some crucial prerequisites of that change. Consequently, the aim of the following study is to qualify strategic dimensions (prerequisites, fundamentals) of a managed care system and to develop, step by step, a path of institutional change in order to make the system work in a country such as Poland.

ECONOMIC GROWTH SUSTAINABILITY:
DO INSTITUTIONS MATTER, AND WHICH ONE PREVAILS?
Abdoul’ Ganiou Mijiyawa
CERDI-CNRS, Université d’Auvergne

This article studies the impact of institutions on economic growth sustainability in a sample of 123 countries, including 85 developing and 38 developed countries, with panel data over the 1960-2003 period. I define sustained economic growth as an episode of positive growth of per capita GDP over five consecutive years. I theoretically show the respective role of democratic, economic activities regulation, and property rights protection institutions for economic growth sustainability. I reconcile the economic approach and the political approach of institutional analysis, by testing the combined effect of these three types of institutions on growth sustainability.

The results indicate that an improvement of the value of an index of politico-economic institutions positively and significantly affects the probability of growth sustainability. This index is a proxy for the general level of institutional quality and captures the combined effect of political and economic institutions. I also obtain a positive and significant effect of democratic, economic activities regulation, and property rights institutions, when testing the respective effect of each institution on growth sustainability. However, when testing the simultaneous effect of these three various institutions, it appears that only the regulation institutions positively and significantly affect the probability of growth sustainability. This indicates that the regulation institutions seem the most important for economic growth sustainability.
My principal results - positive and significant effects of regulation institutions and total factor productivity on growth sustainability - remain robust to alternative methods of estimation, to selected samples, to the use of other institutional quality indexes, to the use of a criterion of high economic growth sustainability, and with taking into account the effects of macroeconomic policies.

COORDINATION OF THE BEEF AGRO-INDUSTRIAL SYSTEM: UNDERSTANDING THE PRODUCERS-PROCESSORS TRANSACTIONS
Mario Mondelli
University of São Paulo

Problem
The international agro-food industry has experienced transformations in response to changes in consumers’ awareness of specific attributes of food products and the requirement of solutions to asymmetric information problems. Production controls become more important and spot markets apparently are less efficient to coordinate the production chain. These transformations affect the beef agro-industrial systems, mainly those export-oriented. Therefore, when studying control problems of the export-oriented beef system, two key questions arise: Which governance structures are present, and which determinants explain them?

Theory approach
These questions concern the institutions and the organization of the economic system where the new institutional economics approach offers helpful insights, particularly transaction cost economics. The study of a coordination system can be approached in two veins: (i) the governance structures resulting from the transaction features, and (ii) the governance aspects resulting from the institutional and organizational environment. According to the governance perspective (O. Williamson), quality-seeking makes market coordination expensive and difficult, promoting more stable transaction relations. Measurement cost theory (Y. Barzel) offers a promising approach when studying the difficulties to measure and protect the value of attributes under transaction (both associated with positive transaction costs).

Methodology
The empirical analysis is focused on the Uruguayan beef agro-industrial system, which has an export orientation. This study integrates qualitative and quantitative analysis. The former consist of a characterization of the beef agro-industrial system and the governance structures involved in the producers-processors transactions. The quantitative analyses estimate: participation of the governance structures; identification of determinants to explain the institutional arrangements; and identification of the relevant product attributes in the transactions and measurement problems. These are the data sources: panel data with producers-processors transaction information provided by the Uruguayan Agricultural Bureau (time period 2004-2005; 110,300 records related to 10,300 producers and 110 processors). The variables for each transaction are: contractual arrangement (direct or by intermediate agent transaction); ID of buyer and of seller; quantity and quality product information; date; and producer-processor distance.

Expected results
This project may contribute insights into the determinants behind the governance structures in the beef system, and the development control mechanisms to promote a better coordinated system.

THE NEW INSTITUTIONAL DESIGN OF THE PROCURACY IN BRAZIL: TRANSACTION COSTS, MULTIPLICITY OF VETO PLAYERS,
AND INSTITUTIONAL VULNERABILITY
Flavianne Fernanda Bitencourt Nóbrega
Federal University of Pernambuco

This project aims to analyze the effect of the new institutional design of the public prosecutor’s office on policy making. The key moment of institutional change was in 1988 when the new constitution vested the Procuracy with great powers. The Procuracy has undergone a radical redefinition in its institutional design, with a very significant extension in its powers, which is unparalleled in the world, as far as this researcher has been able to establish (Voigt 2003). It has become a very important veto player. A polity’s ability to change or to commit to policy depends on the effective number of vetoes in political decision making (Cox and McCubbins 2000).

This research aims to investigate the effects of the new incentive structure on policy-making. The institutional arrangement of Procuracy is a relevant independent variable to explain the quality of the political outcome, the governability, and considering its increasing role in combating crimes, the propensity of politicians to commit crimes. In Brazil, there are unique features in its design, the most important of which is its decentralized nature. Members of the Procuracy are granted unparalleled functional independence because they are not subordinated to the Attorney General. Each prosecutor has unrestricted freedom, only limited by the law. This design implies that each individual prosecutor is a veto player. It is hypothesized that the larger the number of veto players personalized in each prosecutor’s figure, the weaker the Procuracy gets institutionally, the higher the transactions costs are, policy instability. The low level of institutionalization of the Procuracy opens up the possibility of manipulation of prosecutors as instruments for the achievement of interest groups. This vulnerability affects its de facto independence.

The Procuracy’s behavior will be investigated strategically in relation to other relevant political actors in the executive and legislative branches. The research will be based on a dataset containing data on the prosecutor’s decisions. The pre-1988 period will be compared with the post-1988 period. It is hypothesized further that, paradoxically, the institutional change in 1988 produced unintended consequences and may have weakened rather than strengthened the Procuracy.

RULES OF THE GAME FOR RUSSIAN ENTREPRENEURS:
COPING WITH UNCERTAIN NORMATIVE ENVIRONMENT
Ella L. Paneyakh
University of Michigan

What does legality mean? In a situation of transitional anomie, both formal legislation and informal norms undergo massive change; the legislation that regulates the economy is not only too controversial to obey, but also too changeable to monitor for most of the actors. At the same time, many new Russian entrepreneurs still manage to maintain their status as legal businesspeople, law-obeying citizens, and reliable partners through the transitional period that started with the collapse of the USSR in 1991. Although not properly regulated, the emerging Russian markets never collapsed into complete chaos. The question of the study is: how can one remain legal, when total law-obeisance is not an option? I study the informal rules that entrepreneurs developed 1) in order to cope with unfeasible formal regulations, and 2) in order to maintain market order in a situation where the state fails, in Polanyi’s terms, to produce a uniform framework for exchange.

Entrepreneurs aim to predict how state officials evaluate the records of their activities, such as the tax documentation they provide, and they shape their business strategies so that the records they return will not draw extra attention of the state officials. They also engage in direct and indirect negotiations with officials around the application of controversial and excessive rules. They invent techniques that allow maintaining accountability in contract relationships in the absence of state enforcement. With time, through socialization processes, the record-production and negotiation techniques become stable and widespread; they produce informal institutions that mediate people’s relationship to formal legislation. Later these institutions of coping with laws penetrate formal regulations. The system outlives its causes: in 2000-2005, with significant improvement of formal regulations (through legal reform) and the state’s ability to enforce the law (as the state regains its power), the institutions of arbitrary law-application do not disappear, but instead constitute a crucial device for the post-transformational “stabilization” process.

The project is based on in-depth interviews with Russian entrepreneurs, conducted through 1998-2005, which cover the time period since the collapse of the Soviet Union. Some court decisions, official documents, and newspaper reports supplement the data.

INSTITUTIONS AND INFORMAL SECTOR IN BOLIVIA:
THE ROLE OF REGULATIONS AND SOCIAL NETWORKS
Eliana Quiroz
University of Potsdam

The size of the informal economy in developing countries is 41% of its total economy (Schneider 2002: 1), but in the case of Bolivia this figure is even higher, actually the highest figure in Latin America, 67.1% (Schneider 2002: 10). Informality is relevant because it undermines efforts to reduce poverty as individuals are trapped in low productivity and not diversified activities.

Formalization plays a central role in the debate of informal sector because of the possibility to access public services to grow and develop. That is why this paper seeks for effects of regulations and social networks in the attempt of formalization.

Our principal findings are divided in two parts: the first group is the effects of regulations on formalization, including regulations to set up a business, maintenance of legal status, and incentive policies; and the second is about social networks, differentiating familiar social networks, and trade associations.

About regulations, we recognize that although the situation has improved in Bolivia in the last 5 years, reducing time, money, and numbers of steps to fulfil, small enterprises have a modest compliance with principal registration and licenses. The reason seems to be that incentive policies are not perceived precisely as incentives by microentrepreneurs, because they are cumbersome and expensive.

In this way, microentrepreneurs do not count on the state to develop their activities because of overregulation but also because of a traditional lack of ownership in relation with the state (Wanderley 2006). In other words, informal businesses think that the state is not theirs, and compliance with regulations is expensive, so they prefer to develop their own institutions. We identified three types of social networks as a way of informal institutions. But they also prevent informal businesses from formalizing because they tend to isolate them, no matter the size of social networks. (Samanamud 2002; UNDP 2005; Sánchez 2002; Rossell y Rojas 2000).

To sum up, we found several reasons that prevent formalization in Bolivia. Overregulation is the main reason from the side of formal institutions, while isolation appears strongly from the side of social networks.

LEGAL ORIGIN, JUDICIAL INDEPENDENCE, AND INSTITUTIONAL DESIGN
OF DEMOCRACY: AN ALTERNATIVE APPROACH TO “CHECKS AND BALANCES” MODEL OF ECONOMIC FREEDOM
Ricardo Silveira Ribeiro
Federal University of Pernambuco

Current literature in new institutional economics has emphasized the role that juridical institutions play in the economy (North 1990). In this sense, the authors have understood that: a) higher judicial independence is a good predictor of higher levels of economic freedom (La Porta et al. 2004; Glaeser and Shleifer 2002), and b) legal origin is responsible for an important source of variation in levels of economic efficiency (La Porta et al. 2003). The common justification to these conclusions is based on the idea that common law institutions are more positively correlated with economic freedom and efficiency than civil law tradition. But these results are inconsistent with the tendency in theoretical literature from public law which emphasizes that both common law and civil law traditions are closely related to each other in several issues, despite obvious differences in stare decisis doctrine (David, 1978). It is also important to point out that the concept of judicial independence as neutrality vis-à-vis executive and legislative powers is under attack nowadays, due to the fact that the current literature in judicial politics has detected strategic behavior in courts – especially in supreme courts (Spiller, Richman, and Bergara 1999).

Therefore, this research is an attempt to go further than previous results in new institutional economics. It is hypothesized that those variations in economic freedom are better explained by institutional variables that account for the stability of democratic regime and equilibrium among powers, rather than the unilateral emphasis on judicial independence and legal origins. To test that, different models using OLS regressions will be run. The dependent variables will be the index of the security of property, the steps to start up a business, the intensity of regulation, and the government ownership of commercial banks as developed by La Porta et al (2004). The dataset for this research comes from two main sources, the La Porta et al (2004) dataset and the Database on Political Institutions (World Bank 2005).

MATERIAL TRANSFER AGREEMENTS AND INTERORGANIZATIONAL COLLABORATION: BIOTECHNOLOGY NETWORKS OF COAUTHORSHIP
AND COASSIGNEESHIP
Victor Rodriguez, Frizo Janssens, Koenraad Debackere, Bart De Moor
Katholieke Universiteit

Collaborations are crucial to the development of biotechnology. Although material transfer agreements (MTAs) may be useful to exchange research materials between laboratories, policymakers have suggested that the trend towards the standardization of MTAs might impede the progress of biotechnology by constraining research collaboration patterns. The goal of this article is to highlight how patterns of interaction are affected by MTAs. We define interorganizational research collaboration as any co-applied EPO patent or co-authored article, letter, note, or review during 1992-2000 in biotechnology.

By drawing network configurations, we discern how MTAs might influence the participants’ behavior toward collaboration. By depicting network topologies, we find that MTAs could impact differently depending on the status and place of an organization in the network. We go further and assess whether the attachment process was due to other factors than MTAs by isolating the effect of collaborative patterns.

When we isolated the effect of the copublication pattern, we checked if collaborative nodes that used MTAs continued until 2000. We detected 85 post-MTA copublications done by 8 pairs of organizations. Nonetheless, 10 pairs of organizations that received materials through MTAs were discontinued. Among the latter, 3 should be skipped because the results were published in 2000 and there have been copublications after 2000. Regarding the other 7 discontinued pairs of organizations: 3 were stopped because funding had ended, 1 because of lack of research results, 2 because the research project ended up, and 1 was discontinued before 2000 and resumed afterwards. Consequently, MTAs were not the reason for discontinuing the research collaboration according to coauthors or coassignees.

We cannot say that MTAs affected the progress of science by limiting research collaboration. We interviewed 20 scientific directors to get external validation. Seventy percent of them said that MTAs distinguished between use and transfer of the material, what can be interpreted as a difficulty to cooperate with other scientists. On the other hand, 70% of them also said that there were royalty-free, nonexclusive license rights to the provider, which may allow cooperation.

We thank the Steunpunt O&O Statistieken for providing the venue where these ideas were initially discussed and much of the work was done. We acknowledge very much the excellent assistance of Mariëtte Du Plessis, Xiaoyan Song, Rebecca Crabbé and Jean Gilbert.

THE ECONOMICS OF IRRIGATION WATER RIGHTS:
THE THEORY, PRACTICE, EMPIRICS AND IMPLEMENTATION MODALITIES
Moges Shiferaw
University of Basel

Agricultural water supply in many parts of the world is entering an era of physical and economic scarcity. Recognizing this fact, a more recent feature of irrigation water management has been the shift from expansionary policy to efficient use of irrigation water. This has brought a new irrigation water management paradigm shift, decentralization of irrigation water management to end-users. Given the diversity of user-based management, it is always a challenge to choose the best among several. Lack of universally accepted single property right for resource management and the existence of both success and failure stories of all types of rights have further provoked the debate about the choice of optimal resource rights. The wider divergence in perception about the optimal rights and their roles in resource management among policy makers and scholars urges the use of a robust methodological framework to explain the economic logic of mixed property rights and ground policy recommendations with empirical facts.

The current study aims to develop a comprehensive property right analytical framework and empirically examine the economic logic of real property rights and forms of governance, so as to show how property rights are helpful to ground policy discussion and to draw recommendation. The research guiding questions are: How can the efficiency of bundles of rights and forms of governance be analyzed? What determines the structure of individual rights and forms of governance? How does the change in quantity and quality of rights affect efficiency of performance and forms of governance structure? How much is the gain from the change in quantity and quality of rights in terms of irrigation water management efficiency?

The study revealed that the efficiency of property rights and governance structure can be best understood if a property right is conceptualized as a continuous variable and redefined as the sum of separable and heterogeneous bundles of rights. The empirical outcomes derived from econometrics estimation based on 360 sample irrigators indicate that individuals who held higher quality and quantity of rights have shown remarkable physical, allocative, technical, and economic efficiency performances.

ECONOMIC EFFICIENCY AND LIABILITY RULES:
THE CONSISTENCY QUESTION
Ram Singh
University of Delhi and Harvard University

Under the standard modeling of liability rules, liability assignment, generally, does not depend upon the extent to which the parties contributed to the loss. For example, at the time of accident if the care level of an injurer was just below the due level, then under the rule of negligence he is held liable for the entire loss. Moreover, under these liability rules, a party usually faces either full liability or no liability at all. This feature of liability rules has been justified on the grounds of its efficiency properties. However, in a series of articles, this approach towards liability has been severely criticized.

In several scholarly writings, it has been argued that the modeling of standard liability rules is incorrect; it is inconsistent with the ‘causation-requirement’ of the law of torts (Grady, 1989; Kahan, 1989; Wright 87; Honore, 1997). Several noted scholars have made a case for proportionate liability instead (Calabresi and Cooper, 1996). In particular, the proportionate liability has been proposed as an alternative basis for liability assignment. In response to this proposal, Parisi and Fon (2004) have argued that if parties are required to share liability, then they will have weaker incentives to take optimal care. That is, the authors have claimed that under a liability rules that requires sharing of liability, the diligent strategies are not dominant strategies for the parties involved.

My work, in contrast, shows that it is possible to have a liability rule that, in equilibrium, requires the parties to share liability and still does not dilute parties’ incentives to take due care. It is shown that in principle it is possible to achieve consistence between the requirements of legal doctrines like ‘causation-liability’, on the one hand, and that of economic efficiency, on the other hand. In deed, causation-consistent liability can provide a basis for efficiency characterization of liability rules. However, if we expand the scope of analysis by incorporating actual decision making by courts, then the claims regarding economic efficiency of standard liability rules run in serious problems.

REDUCING COSTS OF EXCHANGE
BY COMBATING CORRUPTION IN PROCUREMENT
Roderica Taduran Stamer
University of the Philippines

Corruption in government procurement is prevalent and costly. Transparency International estimates the amount lost due to bribery in procurement to be at least US $400 billion per year worldwide (Eigen, 2005). Previous works have theoretically and empirically established that corruption in procurement can lead to inefficient contract allocation, lower quality of public infrastructure, and a distorted composition of government expenditure. Further, costs of exchange, as defined in Benham and Benham (2001), increase when procurement is marked by corruption.

But procurement reforms are under way. Since 1993, most developed countries around the world undertook major reforms in their public procurement systems. Most of the development banks revised their procurement guidelines beginning in 1995. Developing countries are likewise revisiting their own procurement practices.

This paper examines the experience of a developing country in reducing costs of exchange by combating corruption through a reform of its procurement system. Specifically, it reports on the procurement reform initiatives implemented in the Philippines since 1999. It then analyzes the reforms and shows how they may result in lower costs by, among others, reducing opportunities for corruption. Central to this discussion is the country’s adoption in 2003 of a new law providing for the modernization, standardization and regulation of government procurement activities. Lastly, the paper reports on early success indicators in terms of reduced costs, and discusses quantitative measures that may be used in assessing the effectiveness of procurement reforms in reducing the costs of exchange.

In so doing, the paper shall complement the work done by Lengwiler and Wolfstetter (2006), which reviews the different kinds of corruption observed in procurement auctions and discusses means to avoid corruption, by choice of preferable auction formats, or with the help of technological tools.

Further, this paper adds to the efforts of Evenett and Hoekman (2005), which examines the available evidence on public procurement practices in developing countries, and concludes that while there is a considerable agreement on ends, little information is available on means, particularly on the effective and replicable strategies that developing countries can adopt to improve public procurement systems.

THE EFFICIENCY OF INTERNATIONAL LEGAL RULES
GOVERNING FOREIGN INVESTMENT AND TECHNOLOGY TRANSFER
TO DEVELOPING COUNTRIES
Yi Shin Tang
Cornell University

When designing agreements that aim at reducing inequalities and technological gaps between countries, international policymakers seem to face a tradeoff between strategies that foster inflows of permanent capital and that disseminate state-of-the-art technology. The choice of either approach has severe impacts upon a country’s development because, while direct investments encourage growth through permanent transfer of assets and employment, they fail to diffuse technology in host countries due to the rigid internalization of production. Alternatively, arms-length licensing agreements promote diffusion of technology more efficiently and induce further production of indigenous knowledge, but lack the capacity to rapidly improve economic standards due to the absence of foreign resources in the host market. Our purpose is to examine the role of the international institutions that govern these flows of technology and investments.

First, we attempt to explain the relations and possible substitutive effects between the principal modes of technology transfer (particularly the mechanisms of foreign direct investment and licensing agreements) being commercially performed by transnational corporations and owners of leading technologies. Second, the research investigates, from an efficiency standpoint, the extent to which an international legal rule interferes in the level and composition of technology transfer by affecting the firm’s decision to engage in more FDI or more licensing. The quality of intellectual property protection may have a crucial role in this process. Third, we evaluate whether the current international legal framework governing technology transfers coincides with the optimal institutional environment that would benefit both suppliers and recipients. This assessment not only verifies if these institutions provide the desired incentives, but also if their improvement requires a structural change that is constrained or inconsistent with the international legal system, arguably seen as an inflexible body based on rigid principles of public international law and international trade law.

The object of this study is primarily focused on a few multilateral institutions such as the TRIPS and MIGA agreements, some decisions of the ICSID, and a few selected bilateral investment treaties. Accordingly, three approaches to legal analysis are adopted: economic analysis of international law, public international law, and international trade law.