WORKSHOP ON INSTITUTIONAL ANALYSIS
JANUARY 5-10, 2008
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Regulatory Commons Problem of Brownfields Redevelopment in China:
A Framework of Institutional Analysis
Dong Ai and Sheng-ji Luan
China Agricultural University
Brownfields are abandoned, idled, or under-used industrial and commercial
facilities where expansion or redevelopment is complicated by real or perceived
environmental contamination. They have broader environmental impacts than on
individual sites. Because environmental impacts and benefits can be seen as the
shared resources of an urban commons, institutions that protect this commons can
be seen as common property institutions. Thus the commons framework is very
useful to analyze the dimensions of brownfields redevelopment at different
levels such as neighborhood, urban, and area-wide contexts, especially on
so-called “regulatory commons problem”.
Nowadays China has a high urbanization rate with a marked inclination of heavy
industrialization. A lot of brownfields sites in urban and rural-urban fringe
are redeveloped to meet the need for buildable lands. By our preliminary
research, there are several models of redeveloping brownfields at different
levels in China. Though some environmental regulations have been formalized,
environmental risks and liabilities of brownfields are usually ignored by
government officers, planners, lenders, developers, even housing buyers. Such
fragmented political-legal structures cause regulatory omissions and failures,
or regulatory commons problem, and remains gaps in regulation.
We will examine the legal structure and policy issues of brownfields
redevelopment in China with institutional analysis. Firstly, we will make a
comparative institutional analysis on brownfields redevelopment between China
and some other countries, and identify the regulatory commons problem. Secondly,
we will analyze the appropriateness of institutional arrangements on
brownfields, and discuss the distribution of the private and public costs and
benefits of different redevelopment models in China. Thirdly, we will suggest
ways to bridge gaps in brownfields redevelopment regulation, which are dependent
on the statutory and policy framework of environmental liability and the
perception of the costs of environmental risks.
Court Decentralization and Women’s Wellbeing
Raul F. Andrade
Group for the Analysis of Development (GRADE)
The objective of the study is to evaluate if increasing access to justice has
positive effects on women’s wellbeing. The impact evaluation of a program to
decentralize courts in Peru (MBJ program) will be pursued. The MBJ program
installed 43 new courts in poor localities of Peru where judicial services were
not available. Campaigns were carried out among courts' personnel to make them
sensitive to the unequal situation of women in the communities. The specific
objective of the study is to measure quantitatively the impact of this program
on: marital status, economic transfers after divorce, alimony, domestic and
non-domestic violence, and indicators of intrahousehold decision-making.
A quasi experimental set up will be designed taking advantage of the following
situation: because of a cut in the budget for the MBJ program, out of 83 planned
courts only 43 were constructed. This situation provides a treatment group (43
localities with new courts) and an intent-to-treatment group (40 localities
where courts were planned). The initial 83 localities were chosen on the basis
of poverty levels and needs, and are similar among them. Conditional on being
among the initial 83 localities there is no reason to explain the selection of
the 43 finally treated localities.
Two data sets will be used. One is based upon the National Household Survey (Enaho)
and contains information on marital status and transfers after divorce. Enaho
was applied in 35 of the 43 treated localities and on the 40 intended-to-treat
localities. The second uses the Demographic and Health Survey (Endes),
specialized on women’s health. Endes has information on violence, sexual
assault, access to police offices, criminal events and decision-making in the
family. Endes was applied in 27 treated localities and in 30 intended-to-treat
Propensity score matching will be used to select comparable localities according
to pre-treatment characteristics. Individuals from the matched localities will
be the subjects of study. The treatment variable will be whether an individual
lives in a locality where a court was constructed. The effects on the
aforementioned outcomes will be assessed using regression analysis on the
Determining the Social Costs of Overseas Filipino Workers’ Remittances:
A Need for Better Regulation and Institutional Arrangements
Alvin P. Ang
University of Santo Tomas
This paper considers the present issues surrounding the role of workers’
remittances and its contribution and effect on economic growth, development and
on the changing cultural landscape. In particular, this paper focuses on how
remittances have altered the social, moral and ethical conditions of a
country. We here consider the Philippines as a case study. It is one of the
countries in the world with a long history of sending workers abroad. Last
year, the Philippines received approximately US$12Bn of remittances, almost 10%
of its GDP. It ranks as the third largest recipient of remittances in the world
after India and Mexico. It has now become the largest source of foreign
exchange and has become the underlying strength of the Philippine economy.
Notwithstanding these gains, the remittances have been observed to have altered
the social, political and cultural landscape of the Philippines. Along this
line, this paper attempts to develop a framework to look into the costs side of
this phenomenon and to estimate how the benefits and costs accrue to the
Philippine society as a whole. Specifically, the study would attempt to
aggregate the costs to society in the form of role reversals, broken families,
legal separation, juvenile crimes, rise in drug use, and school dropout rate.
Anecdotal evidence shows that these social issues are rising mainly in areas
where there are concentrations of families of overseas Filipino workers. Thus,
by linking these social issues and remittances, we will be able properly account
for their true costs to society.
Similarly, benchmarking these costs could help clarify the need for better
regulation considering that the Philippines does not have an official policy of
sending workers abroad. Furthermore, an exposition of these costs will help
identify appropriate institutions in lowering societal costs and ensuring the
maintenance of societal benefits.
Comparative Constitutional History of Latin American and
East Asian Countries
Institute of Developing Economies
The fields of law and economics have been growing and have become more
interlinked with continuous interest from researchers around the world due to
their impact on several other areas, like developing economics. Both qualitative
and quantitative analyses are now being used extensively to help explaining the
complex process of development.
On a global scale, there are some good examples of “successful countries” and
other equally good examples of “failed countries.” East Asia is becoming a
paradigm of rapid positive change, while Latin America has been stagnating and
even going backwards in some specific areas.
The overall objetive of the study is to try to follow an interdisciplinary
approach in order to compare the impact of institutions in the long-term
development of several Latin American and East Asian countries. The analysis is
mostly based on the constitutional history of the different countries being
compared, for example:
How many constitutions has each country had?
How many articles does each constitution have?
How many amendments does each constitution have?
When was the first constitution for the country written?
When was the last constitution for the country written?
How stable has each constitution been?
How secure are the rule of law and the general stability of legal institutions?
What comparative impact have had the Roman (Napoleonic or Continental) codes
versus the British legal systems?
Comparisons between the different constitutions in several regions can give new
insight into the constitutional history of independent countries, in particular,
and of the world, in general.
Since the first constitutions were written in the USA and Poland near the end of
the 18th century, there has been a constitutional frenzy in some
areas of the world, led by Latin America with 32 constitutions just in the
Dominican Republic, 26 in Venezuela, and 24 in Haiti. On the other hand, for
example, the United Kingdom, New Zealand and Hong Kong have no constitutions.
This might be partially correlated to the differences between the Roman and the
British legal traditions.
Much can be learned from the constitutional history and the legal institutions
in a comparative analysis around the world.
Incentive Contracts in a Mixed Duopoly: An Experimental Study
Ninghua Du, Shanghai University of Finance and Economics
Guangliang Ye, Southwestern University of Finance and Economics
The previous literature shows that if a public firm is instructed to maximize
social welfare, then the public firm moves the market outcome towards the social
optimum and the government can avoid direct regulation costs (Beato and
Mas-Colell 1984). Industries characterized by imperfect competition among
private and public firms are called mixed oligopolies.
In this experiment, we study incentive contracts in a mixed duopoly. There are
two firms producing homogeneous products. One firm is private while the other is
public. The private owner’s goal is to maximize her profit; the public owner
maximizes the social welfare. Owners can choose among different incentive
contracts that determine their managers’ salaries. The public manager’s contract
is based on a linear combination of profit and the social welfare; the private
manager’s contract is a combination of profit and sales revenue. Managers make
the production decisions upon their incentive contracts. By comparing the
experimental results to the social optimal allocation, we empirically test the
hypothesis that a public firm can be used as a possible alternative to market
On Implementing Institutions: De Soto and Yunus Compared
University of Cambridge
Development discourses have focused on a wide range of factors that impact the
development process but very little attention has been paid to the role of law
and legal institutions in the literature. It is this gap that the paper will
seek to address. Douglas North’s seminal work has established the importance of
certain kinds of institutional structures for stimulating economic growth but
leaves the question of how those structures came to be and, even more
importantly, how to go about setting them in place open. What lessons are
developing nations to learn, then, from the growth experience of the West? Is it
only formal legal institutions that can facilitate the reduced transaction costs
and resultant high economies of scale that allowed the growth rates experienced
in the Western world? On the one hand, the theory would suggest so. But on the
other, the real-world experience of a majority of developing States shows
evidence of deep-rooted problems in effectively entrenching Western-type formal
legal institutions. What is the way forward? The paper will explore this broader
question through the conflicting institutional models provided by Hernando de
Soto’s Institute for Liberty and Democracy at one end of the spectrum and that
of Muhammad Yunus’ Grameen Bank on the other. De Soto’s prescription, taking the
cue from the theory, advocates the setting up of formal property rights as the
‘way in’ for the poor into capitalism by facilitating access to credit. Yunus’
Grameen model, by stark contrast, completely circumvents the traditional
preoccupation with formal legal mechanisms in the credit market and sets up an
extremely effective institutional structure providing loans to the poor that
builds on local norms and networks of trust. These alternative ways of
structuring the interface between formal institutions and informal norms – one
integrating the informal into the formal, the other building the macro
structures from existent micro networks – represent the two options available at
the crossroads of current development policy. The paper, by conducting a
systematic comparison between the two, will take a crucial step towards taking
the momentum generated by institutional economics and the recognition that
institutional analysis is a key component missing in development theory forward.
The Transition from Relational to Legal Contract Enforcement
Singapore Management University
The transition from personal to impersonal contract enforcement is often
considered important for economic development. The question not well understood
is why some countries failed to make the transition. Some studies suggest a
strong cultural preference for loyal personal relationships and hence for
relational contracts may be a cause of underdevelopment (North 1991, North et
al. 2000). This paper builds a simple model on how a society's contract
enforcement institutions evolve. It suggests the inequality in resource
distribution, rather than the cultural preferences, is the fundamental cause of
slow legal development and economic backwardness. A society with huge
inequality in endowment is likely to experience a cluster of mutually
reinforcing institutions including prevalence of relational contracts, poor
legal development, a strong cultural preference for personalistic relationships,
and low social mobility. Latin America seems to fit into this category. When the
endowment is relatively equal, the cultural preference alone does not reduce the
overall welfare though it may slow down the legal development process, and it
would gradually become weaker as legal quality improves. The East Asian
countries seem to be appropriate examples. The western developed economies, with
relatively equal endowment and individualistic culture, are the implicit
benchmark case, whose transition to impersonal enforcement is the fastest.
Foreign Aid, External Macroeconomic Instability, and the Quality
CERDI-CNRS, Université d’Auvergne
This paper explores the effects of macroeconomic instability (term of trade
fluctuations) on the quality of democratic institutions, and foreign aid
capacity to protect them against this instability. Using a sample of 62
developing countries over the period 1980-1999, we adopt an econometric approach
based on simultaneous equations with instrumental variables (since there is
complex interrelationship between institutions, and foreign aid) and we show a
negative effect of term of trade fluctuations on institutions. We also identify
a positive effect of aid on the quality of the institutions which is captured by
several synthetic indexes, in a context of macroeconomic instability. This
effect is measured by an interactive term between aid and terms of trade
fluctuations in which the coefficient proves to be positive and significant.
From current economic research perspective, we know little about the effects
that macroeconomic instability could have on institutions. This paper explores
this question. Moreover, it explores if foreign aid, which constitutes nowadays
a major source of poor countries’ development funding, can function as a
stabilization mechanism. Our results could be explained by the theoretical
arguments which indicate that firstly, positive exogenous fluctuations (e.g. a
rise of the world prices of the raw materials or positive terms of trade shocks)
could generate additional resources and cause rent-seeking behaviors (Cf.
the natural resources curse phenomenon brought up in Sala-i-Martin and
Subramananian 2003); they can also weaken political accountability (Brautigam
and Knack 2004; Djankov and Al 2005), which in turn can lower the quality of
institutions. Secondly, negative fluctuations, by interrupting stable growth,
can weaken institutions, as it has been proved that a sustained economic growth
is a condition for good institutions (Meyer 2000).
So, the main results of our paper is that external macroeconomic instability has
a negative effect on democratic institutions, and aid has a stabilizing effect.
Even if donors cannot synchronize perfectly aid to terms of trade fluctuations,
the policy implications are that aid policies should take more into
consideration structural economic vulnerability of developing countries, since
aid can be beneficial for institutions in a context of macroeconomic
Voluntary and Imposed Racial Segregation Zoning:
A Coasian-Olson Hong Kong Comparative Empirical Study
Valerius Wai Chun Kwong
The University of Hong Kong
My thesis investigates racial segregation from an economic perspective using
publicly available data in land lot records (historical and current land
registers in the Land Registry), property assignments, tenancy agreements,
Crown/Government Leases and Conditions. It provides
reliable factual evidence of publicly available and verifiable data from an
economic perspective on racial discrimination.
As regards racial segregation in Hong Kong, the only serious works done were
those by Lai and Yu (2001) and Lai (2002, 2004). These authors conducted
empirical research on the formation and destruction of discriminatory zoning and
racial segregation. They did not extend their research to discrimination by
private organization. Following in their footsteps, my thesis is a study on the
choice between exclusionary zoning by legislation and voluntary association
within a Coasian-Olson framework.
It is an original attempt to apply the “corollary” of the Coase Theorem, as
interpreted by Lai, Ng, and Yung (2007) and Lai and Hung (2008), and Olson’s
Group Theory (Olson 1965) to test the aforementioned public data explaining the
choice of racially exclusionary zoning legislation and private voluntary
association in colonial Hong Kong. It aims to
contribute to the research on the origins of racial segregation by investigating
the formation of racially discriminatory zoning
through legislation (segregation by edict) and private voluntary association
(segregation by firm) as a means to exclude Chinese from European
in colonial Hong Kong. No one has ever conducted a similar study or used
similar types of data from a Coasian-Olson framework.
The major finding is that a private voluntary association is more likely to form
to exclude Chinese under three conditions, i.e. (a) the original number of land
owners is small, (b) no Chinese land owners are found in the first instance. and
(c) no quasi-racially/racially restrictive covenants in land grant documents.
If either one of the above conditions are not fulfilled, racially discriminatory
legislation is more likely to form.
Why Do Not All Restaurants Charge the Meal Before Eating?
As we know, most restaurants follow the principle “first eat, then pay” which
means that you pay after the meal. However, we find some restaurants charge fee
before customers start the meal. Obviously such charge arrangement could reduce
the supervision cost used to prevent customers from fleeing without payment,
especially in rush hour. However, why do not all restaurants follow such charge
arrangement? This paper tries to answers this question from measurement cost
angle and then extend the conclusion to explain the different arrangements on
“order of contract performance”. One hypothesis is that the more standard the
meal is, the more possible the payment is charged first. The reason is
following: if the transacted item is standard, the seller has an advantage of
measuring the item’s quality, which means that measuring quality left to seller
rather than buyer will reduce cost; if the transacted item is not standard,
maybe the buyer costs less to measure the item’s quality. So if the measurement
of traded item is left to the buyer, the seller has to do something to complete
this transaction. In the restaurant case, if the meal is not so standard, the
seller will give the right of paying after meal to the buyer as the
compensation. Such right is important especially when there is disagreement on
the quality of the meal. The bargaining power of the buyer who pays after meal
is greater than the one who pays before meal. Whether the meal is standard or
not, the seller intends to charge before meal because it could reduce his
supervision cost. If the meal is standard, the seller has no incentive to allow
the buyer to pay after meal because most cost of measuring the item’s quality is
paid by the seller. The general conclusion drawn from this case is that the more
standard the traded item, the simpler the structure of contract. In another
word, the complicated contract is used to deal with the great disagreement about
the traded item.
Do Democracies Grow Faster? Revisiting the Institutions and Economic
Jessica Henson Decker and Jamus Jerome Lim
The World Bank
The recent empirical growth literature has proposed three underlying fundamental
determinants of economic growth, namely, physical geography, economic
integration, and institutional quality. Each of these factors is likely to be
important in its own right; nonetheless, the primacy of institutions appears to
have been overwhelmingly accepted by most researchers working in the area. The
success of empirical work in establishing the centrality of institutions
nonetheless raises another important question: What sorts of institutions
matter for growth?
This paper unpacks the final determinant into both political-economic
institutions that govern economic norms and rules—such as legal frameworks and
the regulatory burden—as well as political institutions, which is primarily that
of democratic development. As such, the paper speaks to the debate on the
different fundamental drivers of economic growth.
A priori, there is little reason to believe that democratic nations
should necessarily grow faster or slower than their non-democratic counterparts.
Theoretical work on the linkages between democracy and growth provide ambiguous
outcomes. Similarly, while some early empirical work on democracy and growth has
found a negative relationship, more recent papers have suggested a positive one.
Using both cross-sectional and panel datasets, we show that, once democratic
development is properly instrumented, there is no evidence that democracies grow
faster or slower than non-democracies; this result is in contrast to much of the
more recent literature. Political economic institutions, however, remain
positive and significant determinants of economic growth, which corroborates
much of the empirical evidence in the literature. This result is robust to a
range of specifications and measures, and is stable across both sets of data.
The empirical contributions of this study are twofold. First, we account for
endogeneity in the cross section by introducing several new instruments for
democracy. Second, we address endogeneity in the panel by using lagged values of
the endogenous variables as instruments for the variables themselves.
Improving the Revenue System under Fiscal Decentralization in Indonesia
Tauvik Muhamad, International Labor Organization, Jakarta, Indonesia
Hanafi Rais, National University of Singapore
Indonesia in the past six years has been experiencing fiscal decentralization as
a consequence of regional autonomy that shifted from a most centralized to a
highly decentralized country. Yet the objective of the decentralization, which
is to achieve better public expenditure allocation in matching service delivery
to citizen preferences, is not fulfilled. Some problems related to the
implementation of fiscal decentralization are relatively still unresolved, i.e.,
(1) lack of robust institutional arrangement and capacity, (2) high-cost
economy, (3) widening regional disparity, and (4) imbalanced intergovernmental
Under decentralization, shifting the fiscal autonomy from central to district
instead of province through expenditure assignment has been eventually
strengthening local government and weakening provincial government. As districts
play significant roles and have more power than the provincial authority,
coordination and hierarchical relationship between province and district no
longer work: both parties duplicated regulation on local tax. Some regions are
boosting their own revenues to finance their public expenditures. Although the
districts tend to prioritize scaling up public services, they introduced local
taxes by widening tax base and increase tax rate which lead to high-cost
Since the regional autonomy law enacted in 1999 allows each district and city to
merge or break out into separate district and city, the number of separated
districts and cities has been increasing. They are mainly in the regions with
rich natural resources, and that has contributed to the widening regional income
disparity within the country.
Prior to decentralization, central government played a significant role in
financing local governments that covered two-third of local government
expenditure. In the post decentralization, further income disparity is taking
place. The General Purpose Grant as an addition to the Special Allocation Fund
that transferred from central government as collected from rich natural
resources to all regions within the country has contributed to imbalanced
intergovernmental fiscal transfer.
This study is intended to identify the decentralized fiscal challenges and to
answer what institutional arrangement and the way forward has to be set to
ensure the quality of public service delivery at the local levels and an
effective fiscal regime at the national level.
When Foreigners Are the Minority: To Collude or To Improve?
Alfredo R. Paloyo
Ruhr Graduate School in Economics
The separation of ownership and control in a corporation (Berle and Means 1932)
has been extensively explored in the law and finance literature. It is
traditionally cast as a principal–agent relationship between the shareholders
and managers of a company. The image of the corporation by early researchers
(Berle and Means 1932; Jensen and Meckling 1976; Easterbrook and Fischel 1991)
is peculiar in that it is characterized by widely-dispersed ownership. The
peculiarity stems from the fact that, apart from the Anglo-Saxon part of the
world, the majority of corporations that exist today are controlled by a small
group, which is usually family-based (La Porta et al. 1998; La Porta
et al. 1999; Mork et al. 2005; Claessens et al. 2000).
In Gilson (2007) and Gilson and Gordon (2003), family-based control is explained
away through the interplay of reputation effects and non-pecuniary benefits of
control in an economy with “bad law”—that is, in an economy with poor
institutions. Later researchers such as Gilson have shifted the spotlight from
the agency costs between shareholders and managers, which was the customary
focus of research, to the agency costs that arise out of the minority–majority
shareholder relationship. However, a foreseeable gap in this line of research is
the lack of distinction regarding the type of minority owner.
It is plausible that the citizenship of the minority shareholder matters in the
conduct of the corporation. A foreign shareholder who comes from a country with
excellent shareholder protection may insist on enjoying the same level of
protection in a target company abroad. On the other hand, it is equally
plausible that a foreign shareholder may collude with a corrupt majority
shareholder in a country with poor shareholder protection at the expense of
other (i.e., domestic) shareholders.
I wish to examine the set of conditions that determine whether a foreign
minority shareholder will behave as a “good” shareholder or whether she will
decide to collude with an exploitative majority shareholder. These conditions
are presumably rooted firmly in the economic and legal institutions that prevail
in any given economy.
An Essay on Chinese Health Reform and Local Government
National University of Singapore
After the collapse of the central planning system in China, health expenditures
have been increasing rapidly, with the largest share of the cost being born by
patients as out-of-pocket payments. To address this problem, the Chinese
government is planning to reform the health system within the next decade. The
new system will be built on two pillars: wide insurance coverage and a network
of publicly owned township and urban community clinics. Local government (i.e.
city/county government), rather than central government, will be responsible for
both pillars. Local government will both manage, and be financially responsible
for, the insurance plans and township/urban community clinics, subject only to
broad state guidelines and with some degree of subsidy from the state. However,
under the current inter-government fiscal system in China, there is a huge
fiscal gap for local government between expenditure to carry out the assigned
responsibilities and revenue available, which forces local government to look
for off budget resources.
Since each city/county will have a public plan and a network of provider
clinics, each city/county government will effectively be in a position that is
similar to that of a monopoly insurance plan of the managed-care type in the
United States. Although the plans will be publicly owned, city/county
governments may nevertheless have an incentive to exercise their plans’ monopoly
power in order to increase the resources available to these governments for
other purposes (such as investment), or for the purpose of paying high salaries
to senior medical personnel. For local governments in poor regions, a major
concern in the past has been how to pay the salaries of the personnel working in
unprofitable township hospitals. The paper discusses the question to what extent
this problem may be overcome by allowing private insurers to compete with the
local government plans (especially in urban areas), or by strengthening the
mechanisms whereby local governments are accountable to the population
(especially in rural areas).
Emerging Donors in Asia and their Implications for Japan’s
Foreign Aid Policies
The University of Tokyo
A region with dynamic developments, the landscape of foreign aid is rapidly
changing in Asia. Japan, which once dominated the region in terms of the
quantity of aid, is gradually reducing its presence, while “emerging donors”
such as China, Korea, Thailand and Malaysia are rapidly increasing their aid
allocation to poorer countries.
The purpose of this paper is to analyze the implications of these shifting
trends by comparing it with Japan’s experience as it evolved from a receiver of
foreign aid into a giver. The main aim of this paper is not to discuss how
increased foreign aid opportunities contribute to economic growth, but rather to
analyze the changes that take place in the institutional setting in the process
of becoming donors.
Case studies will be conducted in Thailand and Malaysia There are three
important factors behind the choice: 1) Thailand is eager to become a “donor”
while Malaysia is not. Malaysia emphasizes South-South cooperation and, unlike
Thailand, does not seem to venture into providing soft loans as their repertoire
of aid. Despite having comparable per-capita income, the way these two countries
provide “aid” to poorer counties differ to a large extent. What factors
determine a country to become one type of donor rather than the other? 2) The
two countries still receive ODA from many countries; in other words, receiving
and giving takes place simultaneously. What lessons have these countries learned
from their experience in receiving aid, and what lessons are being utilized in
their manner of giving? What are the lessons that are not being utilized
and why? 3) These countries operate outside of OECD-DAC scheme of ODA. What is
the institutional implication of new players joining the game under different
The first part of the research will concentrate on collecting data available
about emerging donors, which no scholarships has ever done in a systematic way.
The second part will develop an analytical framework to compare the Thai and
Malaysian policies of foreign aid. Finally, I will compare these results with
the evolution of Japanese ODA and analyze its future role in the Southeast Asian
Resource Curse? A Theory of Contestable Political Market with Endogenous
This paper provides a unified framework to study both the economic and political
aspects of the so-called “resource curse.” In particular, I develop a model of
political competition in a two-sector economy to analyze the effects of natural
resource wealth on economic policy, political development, and civil
insurrection. The appropriation of natural resource wealth entails lower
deadweight cost due to its relatively inelastic supply. When a political market
is contestable, leaders care about popular support and hence resource wealth is
an economic blessing because it reduces the cost of financing the provision of
efficient economic policy. However, when political entry barriers are
endogenous, resource wealth may become a political curse. Natural resource
wealth induces incumbent dictators to run more repressive regimes, but will only
have limited, if any, effect on democracies with strong private sector, and high
costs of rent appropriation and political entry deterrence. Because incumbent
dictators will spend more resource to prevent entry in response to an increase
in natural resource wealth, resource wealth can have no effect on the incidence
of civil war, unless the costs of maintaining or overcoming entry barriers are
affected. These and other predictions are consistent with previous empirical
findings on resource curse, democratic transitions, defense economics, and civil
Why Are the State-Owned Enterprises in China Always Sold by Negotiation?
Huazhong University of Science and Technology
Which is the more profitable way to sell a company: a negotiation or an auction?
In the negotiation, the seller negotiates one by one with a series of buyers who
make short-lived offers, so that the seller has no opportunity to compare the
simultaneous offers of competing buyers, and his revenue is determined by his
bargaining position. Contrarily, in the auction the seller can benefit from the
competition among prospective buyers by setting an effective bidding rule.
Milgrom (1987) concludes that a seller in a relatively weak bargaining position
can do as well as a strong bargainer by conducting an auction. Bulow and
Klemperer (1996) show that the value of negotiating skill is small compared to
the value of additional competition.
However, when it comes to the selling of state-owned enterprises in China, the
situation is just opposite to the theoretical results that most of the
transactions are carried out by negotiation. Why? Doesn’t the seller want to
raise high revenue? The reason is that the selling of a state-owned enterprise
in China is actually implemented and controlled by its original manager, the
agent who only concerns about his own objectives and whose behavior is costly to
supervise, as it involves a long series of principal-agent relationships.
Consequently, the selling mechanism is fixed at the manager’s discretion. In the
negotiation, the manager is easier to privately add some requirement that is
biased to his benefit when bargaining with the buyers. The final result might be
that any buyer who can offer a more desirable rearrangement for the manager will
get the enterprise. In contrast, the winner in the auction is not completely
determined by the manager, so the cost for him to control the transaction
increases. For example, in order to rule out some unfavorable buyers, the
manager has to canvass for a “reasonable” constraint imposed on them or even
bribe the government. Therefore the choice of the transaction mechanism is
determined not by the revenue criteria but by which one can realize the
state-owned enterprise manager’s objective more easily, and that is why such
adverse selection appears.
Why Value-Based Property Taxation Cannot Happen in Transitional
Siu-wai Wong, Bo-sin Tang and Sing-cheong Liu
The University of Hong Kong
Compared with the growth in property markets, the development of China’s
property tax system appears to have significantly lagged behind. The prevailing
property tax system in China is often criticized as a barrier impeding the
rationality, efficiency and transparency of China’s rapidly growing land and
building markets, due to its heavy bias towards sale transactions and non-value
means of tax assessment. Against such circumstances, value-based property tax
for both property transactions and holdings has been taken by the Chinese
government as a major direction in tax reform. However, little progress has been
observed up to now in bringing value-based taxation into practice despite its
importance has been increasingly emphasized in national policies over the past
The purpose of this study is to explore why value-based property taxation cannot
be implemented even when real estate in China has fully resumed its market
value. Drawing upon the perspectives of New Institutional Economics (NIE),
value-based property taxation is viewed much more than a simple task of property
value assessment, and it should be conceived of as comprising a series of
consecutive institutional systems including (1) land registry; (2) mass property
appraisal; (3) tax collection and enforcement; and (4) dispute resolution
mechanism. In this study, the theories of NIE, which are associated with
transaction costs, property rights and institutional change, will be applied to
examining the current mechanism and arrangement in property taxation in China.
This study will argue that the prevailing property taxation system in China is
determined by the transitional institutions of the aforesaid systems. It appears
to be ineffective, complex and costly in itself, but is indeed providing an
alternative solution to better capture revenue generated from the rising
property markets under some given constraints and inefficient gaps in these four
Social Tie and Internal Knowledge Transfer: Does Culture Matter?
University of Paris 1 (Panthéon-Sorbonne)
This project combines the notion of social tie from social network research and
the concept of know-how to explain the role of tie strength in sharing and
transferring the personal expertise in problem-solving activities at the
By adopting a definition of the firm as “a social community”, this study links
social network analysis in the discipline of sociology with the knowledge-based
approach in the organization science, and proposes that three aspects of social
interactions affect the intra-organizational knowledge transfer: the cognitive,
the relational, and the structural.
The co-worker interaction norms in different cultures at the national level are
assumed to be different, thus is the pattern of co-worker relations at the
workplace in local organizations. I use the term “tie strength”, which is
determined by the overlapping degree of instrumental tie and expressive tie, as
the proxy describing this cultural difference to illustrate whether and how the
co-worker relationship patterns influence the process of knowledge transfer
within business firms. By knowledge transfer, I mean the transmission and the
assimilation of the problem-specific know-how, which resides fundamentally in
individuals. Empirical data are collected from Information and Communication
Technology (ICT) firms in China.
The article to be presented is the first part of the study. I limit my
discussion to the cognitive dimension of knowledge sharing between individuals
and explain why the tie strength of the co-worker relationships has an influence
on the transfer process, and how. Preliminary findings suggest that high level
tie-overlap facilitates the share and transfer of knowledge between individuals
by increasing the utilization of metaphors inside the domain of dyadic common
knowledge (mutual knowledge). Data collection is in process.
Do Institutions Matter? Estimating the Effects of Institutions on Economic
Performance in China
Yang Zhao and Ying Fang
Institutions are believed to be one of the main factors to determine an
economy’s long-run performance. However, how to quantitatively measure the
effects of institutions? The answer to this question is of great importance for
us to understand the role of institutions, and of great difficulty, too.
The main difficulty in estimating the effects of institutions is that
institutions are endogenous. Richer economies are able to afford better
education, more lawyers and prosecutors, more educated government officials,
better news media, thus, better institutions. Moreover, there could be other
factors, such as geography, that affect both institutions and economic
performance. Because of the endogeneity of institutions, the OLS estimate of the
effect of institutions on economic performance is biased, making it impossible
to determine the causal relationship between institutions and economic
performance. In order to obtain the unbiased estimate, we need to find an
instrumental variable for institutions.
As highly diversified in local institutions, geography and government policy,
China offers an interesting case to learn the effects of the three factors
quantitatively. In this paper, we try to measure the economic effects of
institutions with city data of China. We employ the two-stage least squares
(2SLS) method to do the estimate. We adopt the enrollment in
Christian lower primary schools in China in 1919 as the instrumental
variable for China’s current institution of property rights protection. We
believe a city’s current property rights protection is related to the extent to
which the city is influenced by western countries during China’s modern history.
The enrollment of Christian lower primary schools in early 20th
century reflects such influence by western countries in China. Our instrumental
variable survives the careful checking of the exclusion condition.
We compare the effects of institutions with that of geography and government
policy. The results show that institutions dominate geography and government
policies as explanation of the variation of economic performance among our
sample of 47 Chinese cities.
An Evolutionary Game Model for China's Medium- and Small-Scale
State-Owned Enterprise Reform
Ninghua Zhong, Peking University
Ji Shen, Yale University
The article tries to explain the long existence of China’s medium- and
small-scale state-owned enterprises in spite of their increased deficits. As the
principle, China’s government keeps state-owned enterprises as the main social
welfare providers. It faces a tradeoff between subsidies for deficits and bonus
as incentives. If the bonus is relatively more expensive, the government tends
to ignore managers’ poor working attitude and pay for the consequent deficits;
otherwise, the government will pay high incentive bonus to avoid subsidizing the
Referring to the concept of the quasi-parameter (Greif 2004), the article
depicts cyclical change of internal incentive mechanism. In our model, the
variable “deficits subsidy” changes slowly with managers’ working attitude, and
can be viewed as fixed and exogenous in the short run while endogenous in the
long run. If deficits reach a critical level, the government would provide high
bonus to motivate the manager to work hard, which results in decreasing
deficits. Once the deficits are below the critical level, maintaining the high
level of incentive is no longer the expenditure-minimizing choice. So the
government lowers the incentive, which makes the manager revert to a shirking
strategy, and the deficits increase accordingly. This cycle of incentives can
cause the birth of the new incentive mechanism, and lead to its demise as well.
By this cycle, the article explains why series of incentive measures were taken
but all failed to solve the low incentive problem.
Comparative statics shows a substitution effect between internal incentive and
external market competition. This is because, basically, they are both
mechanisms capable of mitigating the asymmetric information problem.
Multiple equilibriums exist in our model. With the perfect rationality
assumption of classical game theory, players achieve an equilibrium outcome in
one shot. In contrast, based on the hypothesis of bounded rationality,
evolutionary game theory supposes that players achieve the optimal strategy step
by step through experimentation, emulation, comparison and learning process. We
utilize this dynamic nature of the evolutionary game to know more about players’
responses to institutional changes. Simulation shows in the process of reform,
incentive would not necessarily lead to managers’ working hard, and vice versa.
|2003 São Paulo|
|2011 Chicago|2012 Beijing
|2015 Hong Kong
|2015 Tel Aviv
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