WORKSHOP ON INSTITUTIONAL ANALYSIS
JUNE 16–21, 2007
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ASSESSMENT OF TRANSACTION COSTS
AND EVOLUTION OF NEW INSTITUTIONS
IN COMMUNITY-MANAGED IRRIGATION SYSTEMS
Ram Chandra Bhattarai
The overall goal of this study is to analyze factors affecting the evolution of
a successfully functioning water users' association in selected mid hills in Kathmandu Valley, Nepal.
The study aims to do this by analyzing in detail the nature and
structure of transaction costs that would determine or shape the evolution of a
formal water users' association in community-managed irrigation systems in Nepal.
The irrigation systems will be
categorized into four groups: based on formal institutions,
informal institutions, lack of institutions, and failed institutions. The study will
be conducted mainly with primary information
collected from 50 irrigation systems within Kathmandu valley and from
about 400 households in 10
irrigation systems selected from those. The factors influencing transaction costs will be
analyzed under all four types of institutional settings. The household level
characteristics and the characteristics of the systems will be analyzed to
understand their impact on transaction costs.
We assume that attributes of the institutional arrangements consist of three
sets of variables: functional variables, structural variables, and
performance variables. Functional variables include operational rules, incentive
structures including fines and penalties. Structural variables refer to the nature of
collective choice rules. Performance variables include the size of private
benefits from the system, and the nature of access to different categories of
users, existing conflicts and resolution mechanisms. We will attempt to
find out the private benefits considering crop productivity. We will collect this
information for the selected irrigation systems with all types of organizational
settings and will analyze it with the help of statistical and
PROPERTY RIGHTS AND LAND MANAGEMENT:
A STUDY OF THE EVOLUTION OF LAND TENURE IN BULGARIA
This study investigates the evolution of agricultural land tenure institutions and
analyzes the mechanisms of transition between land tenure regimes. The research
is based on a single country-case study, and the country of choice is Bulgaria.
In a period of about one century, Bulgaria
experienced three major shifts in land tenure regimes. In the wake of the
radical land reform introduced shortly after the fall of the communist regime in
1990, poorly defined, uncertain and insecure rights to own, use, transfer, and
control land property have arisen as important issues which seem to have
significant negative effects on land productivity and land market development in
the country. Understanding the fundamental causes that led to the
ill-functioning current land tenure institutions would create scope for
developing policies and help guide policy-makers in the field.
The study identifies two interrelated central research questions. The first
question concerns the critical factors that brought the present agricultural
land tenure in Bulgaria
into being. Examining the periods from the nineteenth century to the present, the
question addresses the evolution of both formal and informal property rights to
land and stresses the interaction between the two. The implication is that the
evolution of formally established property rights to land cannot be fully
understood and explained without developing a thorough understanding of the
informal institutions governing land relations in the country.
question concerns the specific reasons for which a society decides to
reallocate property rights to land. Research on this question focuses on
providing an account of the actual mechanisms by which transitions between land
tenure regimes in Bulgaria occurred. The key hypothesis is
that the transitions between land tenure regimes in Bulgaria are products of
political processes. The emphasis to be given to the heavily political character
of land tenure in this study represents a departure from previous studies which
emphasize the desires of interacting economic actors for adjustment to new
benefit-cost possibilities to achieve greater efficiency gains as the
determining factors for the emergence of property rights.
The study employs historical research and qualitative and quantitative data
PROPERTY RIGHTS REGIMES AND NATURAL RESOURCES:
INSTITUTIONAL ARRANGEMENTS AT THE JARI RIVER
VALLEY REGION, AMAZON FOREST
Priscila Borin de Oliveira Claro, Robson
Amancio, Decio Zylbersztajn
UFLA, PENSA/SP, IBMEC-SÃO PAULO
Forest resources are vital to the future of the planet. They are shed and home for
almost two-thirds of all known species of plants and animals, and for thousand
of aboriginal and traditional populations. Besides, forests play a crucial whole
in regulating the local and global climate. However, deforestation is
increasing in several less developed countries. The main threats to forest are
illegal logging to obtain timber, clearing for agriculture and pasture, clearing
for building basic infrastructure, and mining. Moreover, institutional aspects
such as property rights regimes can influences deforestation (Alston, Libecap,
and Mueller, 2000; Tietenberg, 2000; Ostrom, 1990; North, 1990). Property rights
regimes define who and how a resource can be used. In Barzel’s lenses (1997),
property rights are composed of legal and economic rights. The legal rights
recognized by the state are those of a particular individual or set of
individuals. Economic rights reflect the ability, in expected terms, to benefit
from a good or service.
Thus, the central question is how different property rights regimes affect
deforestation. The legal right is not sufficient to guarantee sustainability of
forest resources once there are significant variations in the economic rights
(de Soto, 2000). Based on this premise, we hypothesize that the deforestation rate can be high in areas where the legal right is not or poorly defined and
enforced; and where agents invest in short gestation activities because they are
not certain about capturing the benefits of using the resource in a sustainable
In order to test the hypothesis, we relate the deforestation rate to the property
regime and characterize the productive arrangements. It is qualitative
research with case study methodology. It focuses on two different regimes
located in the Amazon
Forest in the Jari River Valley Region. In one area, the regime is public with
collective use, and the other is a private regime. Data come from secondary and
primary sources. At this moment, we are conducting some face-to-face interviews
using a semi-structured questionnaire with local agents.
The results of this study highlight valuable information about sustainability to
public policy makers, private organizations, and forest-based communities.
EFFICIENCY IMPLICATIONS OF THE LAND REFORM PROGRAM
IN THE PHILIPPINES
Ruth H. Francisco
University of the Philippines
In a developing agricultural economy such as the Philippines, distribution of
wealth has important implications to productivity. The agrarian reform programs
in the Philippines since the late 30s were intended to benefit the poor mainly
by redistributing land to small farmers in rural communities. They aim to promote
equitable access to land ownership and other productive resources as well as
encouraging greater productivity of agricultural lands. However, the programs
restrict ownership of land to a maximum of 5 hectares per individual. Also, the
programs provide legal impediments to ex post trading of rights by the
farmer beneficiaries for a period of 10 years. Hence, the
financially-constrained farmers are awarded rights to hold and till the land but
are precluded from using their certificate of land transfers as collateral for
This paper attempts to establish an empirical case that is contrary to the
results of the Fundamental Welfare Theorem and the Coase theorem. It highlights
the fact that in a world where agricultural credit markets are incomplete and
contracts are not enforceable, institutional design of land redistribution
matters. The paper reviews the institutional design of CARP in the Philippines
and identifies its drawbacks on the efficiency of (1) property rights
allocation, (2) rural land valuation, and (3) credit subsidies.
The paper also provides an empirical case where an informal institution
—the secondary land market— arises due to the inefficiencies of the formal
institutions and how an informal institution, in turn, may affect exchange in
the formal institution.
Lastly, the paper argues that minimal state intervention which does not preclude
the functioning of rural land and credit markets is a more sustainable and
efficiency-enhancing solution. An alternative decentralized solution to properly
align the incentives of landownership is identified.
EARLY MODERN INSTITUTIONAL MATRICES: THE BOMBAY EXPERIENCE
Colin C. Ganley
The English East India Company (EIC) took over Bombay in 1668 and immediately
began to provide security to the residents of the island. Before the new
security institutions were in place, Bombay
was vulnerable to many threats within and surrounding the island.
This paper sheds light on Bombay
between 1668 and 1683 with an historical narrative of risks and security. The
narrative describes the threats (Dutch, Portuguese, Moguls, Maratha, pirates and
natural threats) and specific security institutions which were developed to
mitigate the risks that Bombay confronted. In this period, Bombay was run by the EIC for the profit of its shareholders in London.
This long-distance agency relationship created unique institutions for its time.
By examining this historical episode, this paper contributes to discussions
about the roles, forms, and implications of security institutions. What security
policies are best for economic growth? What type of security policy encourages
rather than restricts individual freedoms? The construction of security
institutions and their ‘fit’ in an institutional matrix are discussed with a
focus on the economic outcomes different institutions create.
This paper discusses the specific policy decisions which occurred as economic
growth increased dramatically. Large scale immigration was encouraged and
fuelled the economic engine. Residents of Bombay at all social positions saw
increases to their wealth and incomes.
This paper finds that Bombay’s
high risk environment encouraged the development of a new security institution.
That institution’s form encouraged immigration, economic growth, and increased
personal freedoms. These findings skim the surface of what can be discovered
through further research into the early modern period of colonial institutions.
By researching the early modern period, economic historians are able to learn
more about the impacts of different institutions and policies without the burden
of the assumptions which accompany modern societies.
OF JUDICIAL INDEPENDENCE:
STRATEGIC INTERACTIONS BETWEEN STATE COURTS AND
EXECUTIVES IN BRAZILIAN STATES
José Mário W. Gomes
Universidade Católica de Pernambuco
The writ of suspension is a civil procedural instrument established by Brazilian
Federal Law # 4.348/64. This action is submitted directly to the Courts of
Appeals’ Chief Justices with the purpose of suspending the concrete effects of
an injunction, or a judicial sentence, from a single judge which allegedly
causes damages to the public interest, particularly to the economy, to health or
public safety. Only a few actors have the power of submitting writ of
suspension, namely the chief executives (and heads of important bureaus) at the
three tiers of government, as well as public prosecutors. This instrument has been
an important veto point for executive branches at the local, state and
federal level in Brazilian political system (Tsebelis, 2002; Alivizatos, 1995)
because of its power to guarantee that public policies that reflect their
political preferences remain unaffected despite previous divergent judicial
This research focuses on the analysis of Chief Justices' role in
stopping or preserving public policies of fiscal and economic nature. The
research tests a number of hypotheses regarding the strategic interaction
between the Executive and Judiciary branches and will seek to identify how
political competition and institutional design affect the political transaction
costs involved in the delegation of power from the Legislature to the Judiciary.
These tests will use information from an original dataset on the writs of
suspension that is currently being built for the purpose of this research. It is
hypothesized that the instrument will be used more
in states with less political competition.
This research paper is part of a larger
research project entitled Political institutions, policy-making processes
and policy outcomes in the Brazilian states, coordinated by Marcus Melo,
Lee Alston, Bernardo Mueller and Carlos Pereira.
Tsebelis, George (2002). Veto Players: How Political Institutions Work,
New Jersey, Princeton University Press.
Alivizato, Nicos (1995). “Judges as veto players” In: H. Doering. Parliaments
and Majority Rule in Western Rule, New York, St. Martin’s Press.
DISEQUILIBRIUM: FORMAL INSTITUTIONS IN
CULTURAL SPACE. A CASE OF TERRITORIAL
REFORM IN POLAND
This paper explores the impact of institutional factors on the path of
territorial reform in Poland. I argue that the failure of that reform,
particularly at the county level, resulted mainly from institutional
disequilibrium, namely incoherence between formal institutions (e.g. law
promoting decentralized state) and informal ones (e.g. no tradition of
self-organized local communities).
In many post
communist-countries, informal institutions contradict formal ones, which means
that formal law competes with informal norms of conduct, routines, and social
norms. Competition between formality and informality often results in
institutional disequilibrium, defined as incoherence between formal and
informal institutions (North 1990). Incoherent institutional structures produce
inefficient outcomes. Moreover, this kind of disequilibrium is often accompanied
by cognitive disequilibrium, i.e. incoherence between the external world and
agents’ mental models (beliefs) about that world (North 2005).
In order to verify the
hypothesis, a simple empirical case study was designed. The pilot research was
carried in one county. The empirical investigation was based on the analysis of
citizens’ complaints submitted to the chief office of the county. The case study
confirmed the existence of a contradiction between decentralized relations among
three levels of local authorities and peoples’ mental representations of those
relations. It was found that the majority of the complaints concerned poor
functioning of the commune, though there was no legal interdependency between
the commune and the county. However, people continued to think that the county
controlled each activity of the commune, which had been true before the
decentralization of pre-existing hierarchical structure of local authorities.
The conclusion was that there were present institutional and cognitive
empirical findings could serve as some proposition for modifying and further
applying more in-depth study on these issues. The results from the extended
version of the project could deliver enough interesting information for
working out a theoretical framework that could be used in analyses of
institutional and cognitive disequilibria.
References: North, D.C. (1990),
Institutions, Institutional Change and Economic Performance, Cambridge
University Press, Cambridge.
North, D.C. (2005),
Understanding the Process of Economic Change, Princeton University Press, Princeton-Oxford.
INSECURE ENTITLEMENT TO WATER IN RURAL TANZANIA:
THE ROLE OF POWER AND INSTITUTIONS
Exploring a new
institutional economic framework for analysis
Water insecurity threatens rural livelihoods in Tanzania. Water scarcity is an
issue, but equally important are institutional reasons. In rural Tanzania,
parallel and competing institutions are in place for securing entitlement to
water. The institutional arrangements often result in uncertain and inequitable
entitlement to water and open opportunities for ‘forum shopping’, elite capture,
The modified water policy could instigate institutional change potentially
resulting in more secure and equitable entitlement to water. Nonetheless, little
change is observed. Possibly, the policy is contextually ill-adapted.
Unintentional ‘stickiness’ of institutions can be a partial explanation. But the
status quo is probably intentional to some extent. Powerful actors, gaining
power and benefits under current institutions, are also in a better position to
shape institutions and inclined to the status quo. This study will focus on the
mechanisms by which powerful agents can influence institutions and institutional
An institution is viewed here as a self-sustaining system of shared beliefs about
how a game is played, based on a
summary representation of the equilibrium path. This governs agents’ strategic
interactions and, as such, results in a reproduction of the institution. In
insights in power from sociology and political sciences are integrated.
Power can be exercised by indirectly changing one’s behavior via influencing his
beliefs and through constraining possibilities. First, powerful agents able to
manipulate others’ cognitive frameworks – or beliefs- about the ‘rules of the
game’ and thus the reproduced institution. Secondly, the elite have information
advantages on opportunities and different institutional arrangements. Asymmetric
information will engender a constrained set of strategies for the less powerful
and less knowledgeable.
A second dimension of power is the ability to directly change the behavior of
others. In this regard two mechanisms are distinguished. First, agents’
strategies are socially embedded, thus framed in power and dependency relations.
Consequently, the ‘water game’ is conditional on a ‘social exchange game’ when
powerful agents can punish others in the social domain, making it a rational
decision to consent with the powerful. Secondly, decision making procedures and
governance structures and thus the game form assign power to the players. As a
result, one of the players may be effective for a constrained set of outcomes by
directly eliminating other possibilities.
OFFICIAL STANDARDS FOR FRESH PRODUCT IN BRAZIL:
WHY DO AGENTS NOT ADOPT THEM?
Cíntia Retz Lucci, Decio Zylbersztajn
USP – São Paulo
Why are official standards not adopted in the market for fresh food in Brazil?
Despite the advantages widely claimed by economic theory, official standards are
proposed but not adopted. Agricultural markets include uncertainty derived from
inherent characteristics such as variability and perishability. Standards
homogenize goods, leading to more competitive markets. It is to be expected that
agents will adopt standards to reduce variability.
However in the major Brazilian wholesale markets, the present grade system is
unpredictable, and agents have been refusing to accept new official standards.
Products are classified according to the quality observed and then the prices
are established. Each day a new grade is ascribed. In some cases, not only do
prices oscillate daily, but also what is defined as grade “A” today might be
considered grade “AA” tomorrow.
Since the official standard is voluntary, we assume the adoption is an
organizational decision of each firm. Two hypotheses are made. Agents will face
benefits and costs before and after the adoption of a new standard. If the costs
are higher than the expected benefits, agents will reject the standard.
According to the “governance perspective”, even when net gains are expected,
agents tend to resist standard adoption if it requires specific asset investment
and safeguards will be required in order to protect quasi rents. The second
hypothesis is, according to the “measurement costs approach”, the lower the cost
of measuring, the higher will be the chance that the attribute will become
standardized. Thus, measurement costs of attributes based on official standards
are affecting standard adoption.
Empirical analysis is focused on fresh tomato
wholesaler-retailer transactions in the main Brazilian wholesale market.
The research integrates analysis of the contractual arrangement and market
structure of the agents involved in the transaction with statistical tests of the
causal relations between official standard adoption and measurement costs
and asset specificity. Data sources are a survey of
wholesalers and retailers, and exploratory interviews with wholesale market agents.
Long ago, public administration spent resources trying to introduce
unambiguous standards. The results here may contribute to public policy by showing
the determinants based on efficiency principles that are confounding the
implementation of standards.
COMPARING THE PERFORMANCE OF PUBLIC AND PRIVATE WATER COMPANIES
State University - Higher School of Economics
Despite recent improvements (laws on tariffs, on concession agreements),
remaining institutional and regulatory weaknesses are key factors explaining why
water supply and sanitation infrastructure in Russia is highly
deteriorated and inefficient, while the financial state of most municipally-owned
water companies is so poor. This includes the ambiguity of responsibility-sharing
(and even the absence of contracts as such), inadequate tariff regulation not
creating strong incentives for efficiency.
The Russian Government considers private sector participation as the only
remedy, assuming that the private sector is always more efficient than the public
sector, and giving preferences to concessions.
Domestic private operators entered
the water supply and sanitation
sector in 2003, now servicing some 10% of
urban population under long-term lease contracts. Some of them took investment
obligations. The key problems they faced were identified in earlier studies (OECD,
But the international experience (Tukuman, Buenos Aires, Manila) and
new institutional theory (Williamson, Guasch) show that concessions in
developing countries, with unstable political environment and weak regulatory
capacity, face many problems.
The empirical evidence
from various surveys suggests that there is no systematic difference in
efficiency between public and private operators (Estache & Rossi, 1999). This
research aims to
identify whether and why the private sector in
performs better or worse than the public sector. Performance will be assessed against
objectives, and the sector’s averages and trends. The answer why will be found
- the competitiveness of the contract award process, criteria for selecting operators,
scope of contract obligations, and their implementation in practice;
- regulatory, judicial and other institutions.
So far the author has collected data on key domestic private operators in Russia
and the packages of contracts they concluded in several municipalities. Missing data
will be collected using special questionnaires.
PATENT RIGHTS INDEX IN COUNTRIES IN TRANSITION
University of Delaware
How do changes in the institutional environment impact economic performance? How
important is the legal framework? In our study, we extend the analysis of the
development of intellectual property rights systems to countries of Eastern
Europe. To determine whether stronger intellectual property rights protection
results in a better diffusion of technology, we calculate patent rights indices
for five former socialist countries (Estonia,
Hungary, Kazakhstan, Latvia, and Russia) over a period from 1989 through 2005.
We then compare the results to the ones obtained for two other developing
countries (India and China). The index represents an economic indicator of a given legal system.
It includes five different categories that determine the level of patent
protection in a country.
The data show big progress made during the 1990s
restructuring the old soviet system of intellectual property protection. We also
find substantial disparities among the countries studied. The first extension of
the work that we would like to pursue would be to link empirically the
development of a patent system to economic performance, and the level of
innovation (research and development investment expenditure) and foreign direct
investment in particular. For the latter purpose, there might be a need for a data collecting survey in the studied countries. We argue that
patent right systems should not be analyzed separately from the surrounding
economic environment, and the inclusion of such variables as general business
climate and educational levels might be helpful in understanding transfers of
technology. The second extension would be the inclusion of a greater number of
countries and the analysis of their patent systems over a wider time range.
When studying the evolution of intellectual property rights systems, countries
in transition constitute a kind of natural laboratory. The results obtained can
have implications in law and economics for other countries.
ASSESSING THE ROLE OF LABOR MARKET POLICIES AND
INSTITUTIONAL SETTINGS IN SOUTHEAST EUROPE
University of Klagenfurt
The potential incompatibility of employment protection legislation (EPL)
with the flexibility required for firms and national economies to prosper today
has occasioned much debate and a growing body of research. The central question
has been whether excessively strict EPL has been an important contributor to the
persistently high unemployment experienced in many OECD countries since the
early 1980s. Naturally, empirical research to date has mostly used data on EPL
for OECD countries.
This study presents new data that describe the EPL and other labor market
institutions and policies prevailing in seven Southeast European countries
(Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Romania, and
Serbia and Montenegro) in the late 1990s and early 2000s. The main contribution
here has been to construct the EPL indices following the methodology used by the
OECD. This offers the possibility to extend the international comparative
analysis of the strictness and impact of EPL to a wider range of countries.
The new data provide the basis for a reassessment of the links between EPL and
labor market performance. The analysis strengthens the conclusion of prior
studies that the EPL index has little or no effect on overall unemployment. In
addition, the effect of overall EPL index on the demographic composition of
unemployment is quite weak. However, both the bivariate and the multivariate
analysis support the hypothesis that a stricter regulation of temporary
employment leads to higher unemployment for women and younger workers, as well as
to lower employment and labor force participation rates. This is a novel result
that might be important for informing policy choices when it comes to choosing
the best mix of EPL components.
One policy implication is that in the SEE countries the limits of possible
deregulation have not yet been reached as far as temporary employment is
concerned. As labor market conditions evolve, the focus on initiatives to relax
regulation of temporary employment would contribute to eliminating some of the
barriers to employment for women, youths and other labor force groups that may
face difficulties in gaining access to stable jobs.
CONTRACTUAL CHANGE IN DISTRIBUTION AGREEMENTS
University of Missouri-Columbia
The study of contract use in the wine industry is not new. The relationship
between long-term contracts and product quality attributes in the wine is highly
documented, but documented strictly in terms of the relationship between a
winery and its input markets (Goodhue, et al 2003). There is little analysis on
the effective use of contracts between the winery and its distributors, although
many of the same product quality characteristics can be said to apply.
Williamson’s Transaction Cost Economics theory
suggests that long-term contracts will predominantly be found in environments
where there is a medium level of uncertainty, a medium level of asset
specificity and a significant level of transactional frequency.
The relational agreements between domestic wine suppliers and wine
distributors falls within this description, but only because most states have
franchise laws that allow for wholesaler exclusivity of winery products once an
agreement is reached. In some states those same franchise laws prohibit the
supplier from terminating the wholesaler except in the case of “good cause”,
which can be extremely difficult to prove. This implies that once a supplier
enters a wholesale agreement, it essentially becomes a long-term contract,
desired or not. The opposite is not true for wholesalers, which may terminate
an agreement at virtually any time and as easily by not re-ordering additional
product. These characteristics results in a one-sided long term contract, with
the majority of the benefits to the wholesaler.
Wine distribution agreements have historically been oral agreements between the
winery and the wholesaler, but given the changing atmosphere of the wine
industry and the increasing quality-price attributes of wine and specific
brands, we should expect to see a movement away from oral contracts to formal
long-term contracts including specific performance evaluation measures that
could justify termination on the supplier’s side. This paper attempts to
determine whether changing market demand for wine brands and quality and changes
in state restrictions on direct shipment of wine to consumers lead to changes in
the contractual structure of supplier and wholesale agreements within the wine
INSTITUTIONAL STRUCTURE AND COLLECTIVE ACTION FOR
FOREST MANAGEMENT: A CASE STUDY OF
PARTICIPATORY FOREST MANAGEMENT INSTITUTIONS IN ORISSA
Bibhu Prasad Nayak
Jawaharlal Nehru University
Participatory institutions for the management of natural resources like forests
have a long past in India as well as in other part of the world, and this has
evolved with a continuous human-natural resource interaction. During colonial
rule these resources were nationalized without due importance to traditional
common property institutions; this has made these resources de facto open
access resources and consequently faced the ‘tragedy of the commons’. Inadequate and
inefficient management of state ownership, market failure, increasing dependence
between livelihood system and natural resources and the widespread concern for
sustainable development have led to the evolution of alternative institutions for
management of natural resources. There are two types of participatory
institutions in operation for the management of forests in Orissa, a state in
part of India. These are (1) self-initiated management groups called
Community Forest Management (CFM) institutions, and (2) forest department initiated
Joint Forest Management (JFM) institutions. A certain level of collective action
is required for the sustainability of these participatory institutions. The
incentives structure and the stakeholder involvement influence the level of
collective action significantly and vary across institutional structures.
This paper analyzes the evolution and performance of
CFM and JFM in Orissa by using the Institution Analysis
and Development (IAD) Framework. The empirical analysis uses data from six forest-protecting communities representing
participatory forest management institutions in two forest divisions of
Orissa. A conceptual model of the different levels of participation and their
linkages is tested through econometric analysis, using data for 370 households
across six communities. It is found that CFM institutions are characterized by
increased levels of awareness and participation when it comes to the design and
implementation of institutional rules. JFM institutions have benefited people in
terms of creating employment opportunities and dealing with inter-village
boundary conflicts. Both types of institutions have inherent weaknesses that affect
the level of collective action for sustainable management of the forest. The weaknesses associated with CFM institutions can mostly be
attributed to government policy that does not recognize CFM
institutions and hence does not extend the benefits meant for forest- protecting
MARKET DISCIPLINE AND DEPOSIT INSURANCE:
THE CASE OF RUSSIAN MARKET FOR PERSONAL DEPOSITS
State University - Higher School of Economics
Like any other financial service market, the market for bank deposits is exposed
to information asymmetry problems: all deposits are characterized by some
probability that the bank will not be able to repay due to default, but the
depositors’ ability to change the characteristics of the deposit supply in
response to excessive risk-taking is rather questionable. The deposit insurance
institution is aimed to protect small depositors as regulators perform the
monitoring more effectively than they do. The main problem related to deposit
insurance is a moral hazard one. Even those depositors who have the ability
to discipline their banks stop doing so, having the explicit guarantees of
repayment. Enjoying the absence of market discipline, banks prefer to invest the
accumulated funds into riskier projects which yield more (at a price of
higher risks) and to offer higher interest rates. Therefore the tool aimed to
provide banking system stability might have an opposite effect, if the
introduction of the deposit
insurance system removes the incentives to discipline banks.
This paper investigates whether institutions of market discipline exist in the
Russian personal deposit market, i.e. whether depositors react to changes in
fundamentals, characterizing banks’ additional risk-taking by requiring higher
interest rates, withdrawing their deposits, or switching to short-term or on-call
deposits. In the
end of 2003 mandatory personal deposit insurance was introduced in
August 2006 witnessed a rise in the maximum amount of compensation. Thus the aim
is to test whether depositor discipline differs for different groups of banks
(state, private, foreign) and whether it disappears with banks’ admission to
the deposit insurance system, using panel bank-specific data over the period April
2004 – July 2006.
The analysis reveals that foreign banks’ depositors exert
virtually no discipline either by quantity or by price. State banks’ clients use
quantity-based discipline mechanism, but the only significant characteristic is
bank size (in terms of assets). Maturity shifts exist for time deposits, but
the introduction of the deposit insurance system reduced them significantly. Private
domestic banks’ depositors exert discipline by quantity (choosing a larger bank),
by price, and by switching from on-call to long-term deposits; the deposit
insurance system introduction did not remove this discipline.
DID PRIVATIZATION TRIGGER THE PHENOMENAL GROWTH
OF THE ICELANDIC BANKS?
Throstur Olaf Sigurjonsson
growth and international expansion of the Icelandic privatized banks has been
striking. The three major players have enjoyed asset growth of about 400% from
year 2002 to the end of year 2005. All three banks come from privatization
roots. The economy’s growth performance has likewise been impressive. Real GDP
has grown by just below 5% per annum over the last decade which is substantially
better than OECD growth during that period. The research question to be answered
is whether privatization triggered this growth of the Icelandic privatized
banks. When performances of foreign privatized banks are analyzed, results are
both positive and negative. Privatization alone does not always seem to
significantly impact profitability or operating efficiency. When privatization
in Iceland is analyzed in general, there can only be seen considerable
operating improvements within the banking sector. Other privatized industries do
not do better than private comparable companies.
Variables to be analyzed in this study are both internal and external. There was
a strong liberalization program in Iceland prior to the privatization that might
have delivered major constructive changes in favor of the banking industry.
There were also internal parameters such as changed ownership structure, different
strategies, management style, strong incentive systems implemented, as well as an
aggressive banking culture. Some of these parameters seem to be very specific
for the Icelandic case. There was a total generation shift within management
teams, unheard of incentive systems were implemented, investment banking culture
was brought in, and new strategies were all about aggressive
This study aims for concluding what triggered impressive results in post
privatized Icelandic banks and whether specific Icelandic key success factors
can be identified and exported to other countries. The study also compares
privatization success of the banks with other privatized industries.
VERTICAL INTEGRATION TRENDS IN THE BULGARIAN
PHARMACEUTICAL SECTOR: A CASE STUDY
American University in Bulgaria
Some economic explanations of vertical integration stem from monopoly
considerations and rent seeking. Others justify integration on the grounds of
economies of scale and scope resulting from mergers. A third group of theories
maintain that it is technologically determined. While all those might partly be
reasons for vertical integration, transaction costs seem to be its major
determinant. The paper takes on a transaction cost approach to study integration
trends in the newly emerging Bulgarian pharmaceutical sector. We use Oliver
Williamson’s definition of asset specificity to explain many of the
organizational transformations Bulgarian pharmaceutical companies are
undergoing. Having special attributes, their products and assets seem to favor a
larger size of the companies. As assets become more specific to a single use
and, therefore, less transferable to other uses, parties become more open to
opportunism and require the special protection that integration can supply.
Extending Williamson’s model we find that that asset specificity increases the
profitability of producing to one’s own requirements, while decreasing that of
In its second part the paper discusses the tendency of three major
pharmaceutical producers in Bulgaria to integrate forward into wholesaling and
retailing. These attempts are curtailed by Bulgarian legislature that forbids
vertical integration in the sector. We use transaction costs justifications to
argue in favor of vertical integration. In particular, we stress that forward
integration into wholesaling is observed for products that need coordination of
marketing and distribution where branding is practiced. Product differentiation
is essential for non-generic medicines for which the need for proper advertising
determines ownership of wholesaling. Forward integration into retailing extends
the case of ownership of distribution where special handling and proper
representation of the product are important to the sales of the product.
Nondurable medicines often require such special handling. Medicines require
information, special demonstration, and proper display, which also determine the
ownership of retail stores. Furthermore, as a low-trust, high-transaction cost
economy, the Bulgarian economy dictates that a larger scale of operations be internalized within firms rather than carried out by the market.
INFLUENCE OF ECONOMIC ZONES ON EMPLOYMENT AND WAGE GROWTH IN UKRAINE: REALLOCATION EFFECT OR ALTERNATIVE JOB MARKET
Maria Vyshnya, Olena Nizalova
Kyiv Economics Institute
broadly implemented around the world are aimed to create formal institutions
necessary to encourage business to locate to depressed areas. Regardless of
the optimistic purpose, the existing economic zones (EZ) produce controversial
results. For instance, some of the previous studies have emphasized positive
impact of EZ on job creation. However, there is no evidence that the employment
growth in economic zones is not due to reallocation of labor from other
territories of a country. Similarly, EZ impact on wages is hazy as well.
The major reason for the inconsistency of previous findings is methodology. First,
previous papers ignored institutional characteristics of the zones and merely
concentrated on the presence or absence of the project jurisdiction in a particular
time. Second, regional and demographical characteristics of the territories were
mainly beyond the scope of the analysis.
This paper seeks to improve the methodology of estimating economic zones’
impact. First, we extend the notion of an economic zone via elaborating a wide
range of program treatment variables that consider institutional
characteristics (e.g. expected duration of the program, structure of the offered
tax incentives bundle, employment and capital investment requirements etc).
Second, combination of the difference-in-difference (DID) and the propensity
score matching (PMS) technique with the random growth rate approach allows
addressing criticism about reallocation of resources as the major source of EZ
projects success. The former techniques estimate differences in employment
(wage) changes between treatment and control groups. The latter approach
emphasizes the overall impact of the project on employment and wage growth.
Hence, modest results of the random growth rate model accompanied by positive
outcomes of DID and PMS technique presume that the EZ job market absorbs
under-utilized labor from other regions of the state. Alternatively, positive
results for the entire combination of econometric techniques signal that
employment and wages grow since an economic zone job market is created.
Our analysis covers the entire bundle of 21 economic zones in Ukraine and
exploits panel data on 693 rayons (small administrative units in 25 regions and
the Republic of Crimea) for the period 1995-2005.
LAW, TECHNOLOGY AND ECONOMICS: COMPARATIVE AND ECONOMIC ANALYSIS OF ELECTRONIC
SIGNATURES LAW AND ITS IMPLICATION ON THE LAW OF INFORMATION AND COMMUNICATIONS TECHNOLOGY
University of London
explores how law influences people’s behavior in online transactions and
related markets in the area of technology, and how law should be designed to
promote technology innovation and economic development. To explore these issues,
it investigates the particular technology of electronic signatures (e-signatures)
and their related markets such as the certification service market and the
e-signatures industry. The main research
questions include what is the landscape of current e-signatures laws around the
world; whether these laws are “efficient” in achieving their goals; the
implication in the design of ICTs law; and how new institutional economic theory can
be applied in the situation of China.
It will employ
comparative methodology to answer the first question because law is deeply
underpinned by the historical, cultural, political, economic and technical
development in each jurisdiction. Specifically, it uses four countries with completely different backgrounds as case
the US, the UK, Germany and China.
It then uses economic
analysis to answer the second question. Recognizing different backgrounds in
different jurisdictions, it will apply economic theory by seeking the
similarities, and then consider whether different backgrounds change the
conclusions. The comparative study finds that three key issues are addressed by
different jurisdictions. They are (i) promoting the adoption of e-signatures in
online transactions by offering legal effects to e-signatures, (ii) the
regulation of certification authorities (CAs) in the certification service market,
and (iii) technology innovation and market competition. However, different
approaches are adopted when addressing these issues. Therefore, it will first
address how different levels of legal recognition of e-signatures influence
people’s decisions to adopt e-signatures and how they impact on the parties’
behavior during the legal process if a dispute arises. Second, is the
regulation of CAs “efficient” in the certification service market? Third, how
law influence technology innovation and market competition among different
Last, it will look for
implications for the design of ICTs laws in order to promote economic and
INTERNATIONAL FLOWER NETWORKS:
TRANSACTION COSTS IN GLOBAL CHAINS OF EMERGING PRODUCERS
Jo H.M. Wijnands, Jos Bijman
past decades, developing countries experienced a rapid growth in their exports
of highly perishable horticultural products to developed high-income countries,
such as the export of flowers from East Africa to Europe. One of the challenges
for East African flower producers is to choose a proper international marketing
channel. With no domestic market, these producers highly depend on international
This paper describes the structure of international flower chains, using a
Transaction Costs Economics (TCE) perspective. It discusses the presence of the
classical governance problems of asset specificity and uncertainty (both
environmental and behavioral), and how growers deal with these problems.
Interesting from a TCE perspective is that growers first choose a marketing
channel and then adjust the transactions (by choosing different products) to
these governance structures. Basically, flower producers have two options as
marketing channel: through the auction in The Netherlands or through contracts
with retailers. These channels correspond with the governance structures
‘market’ and ‘contract’ (or hybrid). A significant part of the growers actually
use both marketing channels, implying that the governance structure does not
fully solve the governance problems.
The description and
analysis of the flower chains is based on original empirical data. The dataset
consists of two survey samples. In 2005 interviews were held among Kenyan
growers. This resulted in a survey of 24 growers, corresponding to 27% of the
identified Kenyan growers. Ethiopian growers were interviewed at the end of 2006
which resulted in 35 surveys, 70% of the population. Preliminary results of the
Kenyan case showed that the firm organization differs significantly between the
two market channels. Auctions provide transparent markets and guarantee buyers
for all quantities within the industry standards, thus reducing search,
negotiation, and monitoring costs. Higher levels of marketing by auctions
result in less personnel involved in these transaction activities. Higher
levels of auction marketing also correlate with a smaller number of flower
varieties produced per grower. Direct sales to retailers require more varieties
of flowers, due to consumer preferences of differentiated products. The paper
will elucidate other differences between chain governance structures and between
the two countries, Kenya and Ethiopia.
REGULATORY STABILITY AND ORGANIZATIONAL FORM:
AN EXAMINATION OF THE
OF A MULTINATIONAL HOTEL FIRM
Nathan Wilson, Francine Lafontaine, Rozenn Perrigot
University of Michigan
Using a large proprietary data set, we explore the impact of regulatory
conditions on the organizational form decisions of a large multinational hotel
firm. We derive our motivation from a combination of theories from the
franchising and institutional economics literatures, which suggest that
organizational form decisions will be influenced by the regulatory stability of
the host country. To proxy for this factor, the paper uses Witold Henisz’
POLCON variable, which is based on the number of potential vetoes a policy faces
before being enacted.
We hypothesize that regulatory instability impacts organizational form decisions
in two ways. First, by raising the likelihood of hold-up activities by local
officials, an increase in regulatory uncertainty is expected to reduce the
desirability of organizational forms in which the firm shoulders the bulk of the
financial risk. Second, we argue that a more uncertain policy environment is
linked to diminished confidence in the enforceability of contracts. Therefore,
if there are important reputational externalities, then greater policy
instability should cause the firm to prefer organizational forms in which it
retains operational control rather than forms in which local agents are
contractually obliged to perform in ways that protect the firm’s intangible
The hotel industry presents an excellent case to test these hypotheses because
individual units take one of three different forms, which differ in the extent
to which the firm is involved in the financing and operation of the unit. Using
a multinomial logit specification, we find considerable support for our
hypotheses. In countries with high regulatory uncertainty, the firm
overwhelmingly utilizes an organizational form that reduces its financial
exposure yet allows it to retain operational control. This result has
implications for recent research that has sought to refine the standard
principal-agent model of contracting to bring it into greater agreement with the
empirical literature in terms of how risk is supposed to impact contracts.
INSTITUTIONAL ANALYSIS OF BANK REGULATION AND SUPERVISION:
TURKEY AND POLAND
Orhan Hilmi Yazar
The University of Sydney
The rise in the number of banking crises since the 1980s has made banking
regulation and supervision a crucial and contested element of economic policy
making. The objective of banking regulation and supervision is to maintain
stability in the banking sector and allow accommodation of savings and
investments without interruptions. The debate about the design of banking
regulations and the most appropriate tools of supervision has become popular
with the East Asian Financial crises in 1997. The unexpected fall of successful
East Asian economies altered paradigms about these countries around the world
,especially within the international financial organizations like IMF and WB. The
“miracles” have become corrupted and were associated with crony capitalism and
bad governance. The blame was put on lack of prudential supervision and
regulatory forbearance. This diagnosis led the international community to
propose an extensive good governance agenda in the region.
My current research project examines the institutional underpinnings of economic
policy-making and implementation in the area of bank regulation and supervision.
I investigate the regulatory policies and their application, with a specific
notice on supervisory processes, in Turkey and Poland since the liberalization
of financial markets within these countries. Turkey, with a record of highly
volatile financial sector and its changing regulatory environment over the
course of years provides an excellent case to study the role of institutions in
this specific policy area. Poland’s experience with its prudential reforms and
supervision is the control case for the research findings attained in the
The significance of the issue has increased with greater pressure for
harmonization in banking regulation and supervision around the globe. The
initial 1988 BASEL Accord setting regulatory best practices for G-10 is now in
use in 120 countries. BASEL II initiative, which is to be implemented in 2008,
has even now become an inevitable part of the regulatory debate, not only in G10
but also in many developing countries. Understanding the role of institutions in
the course of interpretation and importation of ‘best practices’ besides
domestic regulatory practices is crucial to assess the impact of the BASEL II in
the near future.
COMPENSATORY CONTRACTUAL ARRANGEMENTS:
AN EFFECTIVE APPROACH TO IPR PROTECTION
Sun Yat-Sen University
adopted the policy of economic openness and reform in the late 1970s, developed
countries have imposed tremendous pressure on Chinese intellectual property
issues. In recent years, with the expansion of foreign direct investment and
international trade, the pressure becomes stronger. In many reports, such as
Special 301, China hasn’t adequate and effective intellectual property
Essentially, Intelligence Property Rights (IPR) are the property rights of
ideas. Ideas are a highly valuable and economically significant resource (Cheung,
2005). According to the Coase theorem, if property rights cannot be well
protected, the supply of ideas will be inefficient. For the society, investments
and innovations become less and less. However, we never find this happen in China.
On the contrary, China has become the NO.2 country spending on R&D in 2006.
The situation above results in a question: if China
really hasn’t effective IPR protection, what can explain the great flow of FDI
and the innovations there? The key point to answer this question is how we
measure the protection of IPR. The method to measure IPR protection in the
reports must lose something important.
The measurement of IPR has been a concern for many scholars and practitioners.
But the scarcity of such research needs more attentions. Almost all the scholars
follow this method——Law Measurement and Enforcement Measurement. But legal
protection, which is constrained by transaction costs, is not the only way
to protect IPR. This paper presents an alternative approach to IPR protection,
Compensatory Contractual Arrangement (CCA).
In some industries in China, such as the automobile industry, the equity percentage
is restricted to a legal maximum by the government. Under this condition, if
compensating payments do not take place to the extent of restoring the resource
use, few investors will allocate their resource there. Some adjustments were
observed. Specifically, the existence of CCAs, such as patent license, besides
the main JV compact, make sure that different forms of arrangements may imply
the same effect of resource use. In the contractual arrangement, IPR can be
protected well. On the one hand, foreign investors can share the profit JVs
make, on the other hand they can get complete license fee, because every product
is supervised by them. CCA is an efficient way to protect IPR, though it’s very
difficult to be quantitatively measured.
TRANSITIONAL INSTITUTION FOR THE EMERGING LAND MARKET
IN URBAN CHINA
National University of Singapore
Chinese economic reforms since 1978 have been a continuous process of
fundamental institutional change. The new institution of ambiguous property
rights over state-owned urban land evolves from the socialist people’s
landownership. This institutional change is driven by two new organizations –
the local developmental state and danwei-enterprises. The new institution
facilitates the formation of an emerging land market. The land market,
structured by ambiguous property rights, has accounted for the dynamic urban
physical growth in many of China’s coastal cities in the 1980s and 1990s.
Nevertheless, massive rent dissipation induced by the new institution does not
provide market certainty, nor does it offer incentives for optimal development.
The cost incurred by the institution is gradually overtaking its benefit (to
create a land market). The ambiguous property rights are deemed to be a
transitional institution during the development of land markets in urban China.
Private zoning emerges to enhance efficiency of land development.
|2003 São Paulo|
|2011 Chicago|2012 Beijing
|2015 Hong Kong
|2015 Tel Aviv
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