Ronald Coase Institute: 2009 Bratislava Abstracts

2009 Bratislava Workshop: Abstracts

WORKSHOP ON INSTITUTIONAL ANALYSIS
MAY 10–15, 2009
BRATISLAVA, SLOVAKIA

ABSTRACTS

Radio Spectrum Management in the European Union:
The Role of the Market
Rajen AKALU
Delft University of Technology

The radio spectrum describes the range of frequencies used by wireless technologies that send information in free space through the use of electromagnetic waves. Spectrum is limited insofar as the interference that results from conflicting transmitting signals or energy emissions. The aim of this thesis is to determine when the market can be used in the management of spectrum in the European Union.

A complex set of institutions emerged at the global, regional and national level in order to establish rights to access and make use of the spectrum. This was necessary in order to prevent a 'tragedy of the commons' scenario.

Technical imperatives to mitigate interference as well public character and scarce nature of the spectrum resource featured prominently in government decisions not to create a property rights system in radio frequencies. This is because a pure property rights system to access radio frequencies carried with it the potential to create private monopolies of the medium of radio frequency communication, and by extension the message transmitted.

In this thesis the seminal article The Federal Communications Commission by Ronald Coase is taken as the analytical point of departure (Coase, 1959). Coase's analysis has had an unquestionably profound influence on the policy orientation of spectrum management in countries throughout the world.

Coase advocated the use of market mechanisms to effect economic transactions via the institution of property rights and the price mechanism. He adds that administrative discretion should be set to the narrowest possible limits to allow these transactions to occur.

Following Coase, proponents of this approach subsequently argue that the market should be the default method of allocating the radio spectrum. However the central aim of this thesis is to demonstrate that what constitutes 'the market' in the context of spectrum is in fact a political construct. Thus with respect to radio spectrum management the market should be regarded as a tool to be used under prescribed conditions rather than as a default public policy measure.

The Role of Shared Mental Models for Adaptation Policies to Climate Change
Ilona BANASZAK, Piotr Matczak, Adam Chorynski
Slovak Academy of Sciences

Climate change poses challenges in terms of availability of financial resources and technology, institutional change, and scientific knowledge. Along with these needs, adaptation practices face also difficulties connected with perception of risks and adaptation. In the paper we analyze the role of mental models for adaptation in Europe.

Mental models are internal constructions, which provide interpretations of the environment and how the environment should be structured. Ideologies are shared framework of mental models while institutions are external to the mind mechanisms individuals create to structure and order the environment (Denzau and North 1994). Shared mental models and institutions are essential to the way societies structure their environment and their interactions with it. Individuals with different cultural and environmental learning experience have different theories to interpret the world around them. The information feedback from their choices is not sufficient to lead to convergence of contradictory interpretations of reality and thus in such cases multiple equilibria are possible (Denzau and North 1994).

The paper analyses qualitatively in-depth interviews recorded with over 40 European experts in the area of adaptation policy to extreme weather events such as floods, heat waves and droughts. The experts were selected to represent groups such as scientists, policy makers, and practitioners and sectors such as agriculture, urban planning, and tourism.

The results suggests that although promising adaptation measures exist, they are oftentimes not implemented due to persistence of traditionally used engineering approach among policy makers which believe in hard measures such as building ever-higher dams. This approach also persists in the institutional mechanisms, what can be illustrated by lack of coherent policies, lack of institutional adjustment, and persistence of outdated policies to cope with new, multiple environmental stressors. Additionally, while scientists tend to view the challenges of climate change in terms of overall adaptation of the society or different sectors both groups of policy makers and practitioners think and operate more in terms of costs, benefits, development, and wealth.

The study also reports geographical differences in adaptation policies. It supports findings of Vari et al. (2003) who claim that in Eastern European societies shared mental models that assume solidarity of taxpayers and responsibility of the state creates difficulties in vital development of spontaneous adaptation, on voluntary basis (e.g. development of insurance instruments).

Banking Sector Development and Growth:
Backward-Looking Inter-Country Infinite VAR Model for the EU27
Maksim BELITSKI
Belarusian State University

Many studies have attempted to determine the degree of competition and banking sector development all over the European Union. The majority of studies have made this assessment relying upon only one of the various measures developed for this purpose. In trying to assess the degree of competition and banking sector development in 27 European countries, existing indicators of financial markets development are found to give contradictive predictions across and within countries over time. This is the result that indicators of bank competition and efficiency measure different things and is influenced exogenously by cross-country heterogeneity. We treat financial services liberalisation as an exogenous variable and economic growth, banking sector development, banking technology and financial stability as endogenous.

Vector autoregressive model analysing the short term dynamics, dominance effects across the countries and exogeneity is the main focus. We consider an application of the Infinite VAR methodology to one of the long standing questions in the financial and growth literature: does higher development of banking sector competition and technology predicts higher growth, or is the higher growth that predicts the development of banking sector or (predictability) run both ways? The same question we address to financial stability and economic performance in the same model.

Implementing causal interdependence of banking sector efficiency and growth, we look at the behaviour of impulse responses of the exogenous shocks.

Cross-sectional augmentations introduced by Chudik and Pesaran (2007) helped us to deal with so-called "curse of dimensionality" problem across EU27 in a model. For EU27, which can be regarded separately as the small open economies, the microfoundations of these VAR are virtually identical to those derived by Gali and Monacelli (2005). The main result attempted that the measure of banking sector efficiency and technology suggests that competition in the credit markets in the Western and Central Eastern European countries may well be stronger than implied by present-day analysis. Gravity concept predicting bilateral cooperation across the countries based on the economic sizes and distance between them does not prove to be significant for the cross-country banking sector development in EU27.

Given the influence of country-specific factors on banking sector efficiency measures the adjustment of bank's market power and bank technology to the shocks in financial stability and output gap over a period of 1993-2008 and vice versa.

Homeowners' Associations in Russia: An Institutional Analysis
Ekaterina BORISOVA
State University Higher School of Economics

Private residential housing involves common property that is managed by homeowners associations (HOA). Organized as non-profits, such associations touch upon a number of important concepts and problems of institutional theory, such as commons, common agency, and collective action. Their performance depends upon a number of economic, legal and social factors; prominent among the latter is social capital that comprises trust, propensity for cooperation and self-organization, volunteerism, etc.

The institution of HOA is currently being introduced in Russia as part of residential housing and public utilities reform. This process encounters a number of problems, and performance of the existing HOAs differs in a broad range from dysfunctional to highly efficient. Available evidence reveals incidences of capture of the immature institution by vested interests in bureaucracy and local utilities, and the unresolved collective action problem that allows such abuse. To better diagnose the situation and produce policy recommendations, we measure efficiency of HOAs and explain the observed performance variations by physical, legal, institutional and social factors. Efficiency measures are obtained by applying the stochastic frontier technique, and subsequently regressed on the above factors which include characteristics of buildings, legal status of HOAs, transparency and accountability of HOA management, socio-economic profiles of member households, and various measures of social capital.

Empirical data has been collected by surveys of homeowners and HOA chairpersons conducted in 2008 in two Russian cities (Moscow and Perm); the questionnaire used in the survey included questions on satisfaction with various aspects of HOA performance, participation in HOA, trust and social ties to fellow homeowners, etc.

Results of our analysis shed light on an outcome of an institutional transplant that has no prior history and experience and unlike some other institutions recently introduced in Russia cannot properly perform without grassroots participation and input. Apart from its practical significance, our research contributes to better understanding of institutional complementarity in management of the commons.

Increased Freedom of Choice and Quality of Higher Education
Tatiana BUJŇÁKOVÁ
Slovak Academy of Sciences

Quality of education is considered to be one of the most important, even if not an easily measurable parameter of education. Can opening the higher education system lead to an improvement in the quality and hence satisfaction of students in Slovakia? The measure of quality in ARRA´s (Slovak academic ranking and rating agency) survey is satisfaction of students with different aspects of higher education services (namely teaching process, teachers, organization of teaching, PC and Internet, library, teaching rooms, housing provided by school). In 2007 ARRA conducted a survey on students´criteria for choosing university as well as whether they would choose it again if they had a second chance or recommend it to others. Only 60% of students claimed to be satisfied. The longer they attended the school, the less loyal was their response. One of the conclusions was that the quality of Slovak higher education is the result of the relatively low supply and high demand, and that the array of choice is limited if students decided to abandon one school to start studying at another.

By the end of 2009 a new law on higher education is planned to be adopted in Slovakia that will enable students to use the credit transfer system to transfer among different schools within Slovakia during their studies. In addition to that, it will introduce a differentiation of higher education institutions into universities, higher education schools, and higher vocational schools, and simplify the registration of foreign OECD countries´ based universities in Slovakia.

As students and schools will be subject to continual reassessment, pressure will be exerted on schools to retain or attract students in order to avoid financial losses derived from losing students as their transaction costs of switching to a different school will be conspicuously decreased. They should see both an increase in quality standards of students´ achievement and higher education offered. The goal is to analyze the extent of students´ turnover after the adoption of the new law and to review the subsequent impact in the form of quality increase reflected in higher loyalty in future survey outcomes.

Health Policy, Alternative Politics and Institutions:
A Conceptual Framework and the Israeli Case
Nissim COHEN and Shlomo Mizrahi
Ben-Gurion University of the Negev

Healthcare systems around the world face significant challenges that often lead to reforms, transformations and institutional changes. However, the impact of political behavior on policy formation processes as well as on output and outcomes is rarely studied, although this variable is central in explaining policy failure in general and in healthcare systems in particular.

This paper attempts to integrate political behavior into the analysis of policy making and institutional change by explaining the impact of a specific type of political behavior – termed here alternative politics – on healthcare policy and institutional healthcare settings. The paper explains the central characteristics of this mode of behavior in the context of new institutionalism and demonstrates its impact on healthcare policy and institutional healthcare settings in Israel.

Alternative politics refers to specific strategies adopted by citizens and interest groups in response to their dissatisfaction with the declining availability of governmental services. More specifically, alternative politics is based on a "do-it-yourself" approach in which citizens independently adopt extra-legal, and often illegal, strategies to improve or augment services provided by the government. In many cases such strategies are adopted by individuals who want to solve their immediate problems, as in the example of those who want to obtain more responsive and better quality medical treatment, rather than by organizations seeking to resolve these issues. Alternative politics is also characterized by a sophisticated amalgamation of public resources and private financing. We suggest that when such a mode of political culture is diffused to all sectors and levels of society through a process of collective learning, all players – including politicians, interest groups, bureaucrats and regular citizens – are guided by short-term considerations and apply unilateral strategies that bypass formal rules either through illegal activity or by marginalizing formal rules.

The implications of alternative politics for the operation and management of healthcare systems are many. In this paper, we will focus on the effect of one of the major cases – the development of black-market medicine. The analysis is based on primary and secondary textual resources as well as interviews with Israeli politicians and leading bureaucrats.

The Role of Social Capital in a Market for Experience Goods
Adam CZERNIAK
Warsaw School of Economics

The problem of market failure caused by information asymmetry between the seller and the buyer has been widely discussed by economists since the publication of Akerlof's analysis of the market for "lemons" in 1970. Although, there is a large number of papers and models investigating the possible solution to this problem, only very few of them consider the role of social institutions in reducing market failures in the case of experience goods.

In my research I argue that social capital, understood as the sum of all resources (e.g. information) that an individual can obtain from his social connections, can largely reduce market inefficiency. To justify my thesis I propose a nonlinear dynamic model of interaction between the seller and the buyer in a market for experience goods. The model is based on a probabilistic information diffusion function which depends on the social structure between the customers. I assume that the social structure implicates the distribution of the social capital between the buyers.

The outcome of my model shows that market failures due to lack of information can be reduced not only through state intervention, market-based regulations (e.g. warranties, trial periods) or additional markup for the seller (i.e. goodwill mechanism), but also through accumulation of social capital by the buyers. The higher the level of social capital in the society, the lower the incentives to cheat on quality by the seller. At the current stage of my research I am searching for methods to verify the models results empirically. If this could be proven there would be a wide field of applications and interpretations, especially while considering the market transformation in the Central and Eastern Europe countries. In those countries different social capital assets in the 1990's could imply higher market inefficiencies during the transformation period.

The Effects of Campaign Spending on Brazilian Electoral Outcomes:
Combining Data Envelopment and Spatial Regression Analysis
Dalson FIGUEIREDO FILHO
Federal University of Pernambuco

The effect of campaign spending on electoral outcomes is one of the most controversial issues in contemporary political science. On methodological grounds, there is a disagreement among scholars over the appropriate functional form to estimate this relationship. The principal difficult is that simultaneity problems have proven so intractable (Jacoboson, 1990) and then OLS estimates are necessarily biased. In addition, comparative empirical work on this subject is limited and very little is known about the effects of money on votes outside of the U.S. z

This paper aims to estimate the effect of campaign spending on electoral outcomes using both methodological approaches: (1) it uses Data Envelopment Analysis (DEA) to estimate the efficiency of candidate spending across different parties and electoral districts; (2) It employs spatial regression analysis to test the hypothesis of spatial dependence of money spending efficiency. The unit of analysis is the 2006 House of Representatives national elections. The results suggest that challengers' efficiency coefficients are higher than incumbents', and poverty levels are positive correlated with higher intensity of campaign spending efficiency.

Microfoundations of Institutional Change: Evolution of Moral Sentiments
Petr GOČEV
University of Economics

It is well recognized that the collective actions necessary to deliver any institutional change are prone to coordination failures. If the collective action problems were pervasive, inefficient and unjust institutions would prevail even when recognized as such by the majority. However, in the social history of mankind, institutional changes doing away with such institutions have happened. The emergence of a movement aiming at institutional change can be conceptualized as a public goods game. The problem is that the tit for tat strategy enabling rational cooperation in iterated games breaks down if more than two persons are involved, or information is private or noisy, so that it is not clear who defected or not possible to punish defectors without simultaneously punishing co-operators. The answer provided to explain cooperation in public goods games involves an internalization of values. Nevertheless, this answer immediately bears another question: how is it possible that people internalize values that make them expend personal costs for the sake of benefiting others, or to eschew opportunities for gaining a personal benefit at the expense of others?

Moral sentiments provide the proximate motivation for an action perceived by the agent as altruistic. The puzzle is to explain how such sentiments have evolved. A combination of insights on cognitive biases and altruism is attempted by the development of an agent-based model simulating the co-evolution of overconfidence and morality. The intuition is that the evolution of these traits may be mutually reinforcing. Whenever agents are overconfident, the group is better protected from an invasion of immoral agents, as some actions perceived by them as fitness enhancing turn out to be fitness reducing. Here, morality is modelled as a propensity to eschew opportunities for committing crimes perceived by the agent as fitness enhancing. Over- and under-confidence are modelled as systematic over- and under-estimation of the probability of avoiding punishment. By modelling the evolution of cognitive and motivational biases simultaneously, it is possible to explore their mutual dependence and sensitivity to other parameters in a framework allowing for costly punishment and interplay of selection pressures at multiple levels.

The Essence of Happiness in the Central European Countries
Martin GUZI
CERGE-EI

My research explores the relationship of happiness with economic terms in the Central European countries. I estimate an econometric model to investigate whether the rapid economic changes helped to go through aggregate shocks (such as reforms, various changes in political, economic, and social life) with fewer losses for the happiness. Former transition economies have experienced a number of interconnected political, social, and economic reforms. Although these economies have been growing steadily and showing progress in the market reforms process (EBRD, 2006), converging to the level of developed market economies, people's adaptation to the transition period and to the new conditions of market economy will last longer. In fact, people from transition economies still report lower levels of happiness than people from developed market economies. Some research (for instance, Sanfey and Teksoz, 2005; Lelkes, 2006) underlines that average happiness in transition countries is not just low but it have decreased during the transition period.

The purpose of my research is to find out whether variation in economic development implies different happiness changes and, thus, different adaptation of people during reforms using the data from transition countries as a special case for studying both idiosyncratic and aggregate shocks to happiness. Such an analysis would shed light on understanding the differences in happiness levels between developed market economies and transition countries, and differences in reforms implementation in former transition countries. The principal database for my analysis is the Eurobarometer survey conducted by the European Commission. Since 2004 also new EU member countries were included into the survey. The data files are free to acquire and include all relevant information: self-reported life satisfaction and all standard personal socio-demographic characteristics, such as gender, age, education, marital status, number of children, income level, and others.

Tax Determinants in EU Harmonizing Process
Tomáš KERUĽ
University of Economics in Bratislava

European Union countries were considering harmonized tax system for quite some time. The last of those attempts was the Treaty of Lisbon which exhibited possible barriers for some countries in tax policy, preventing tax dumping which is popular in Ireland and some of the later accepted members.

In this paper I introduce a model constituted of countries as individual agents. Country size, tax policy, social welfare, and foreign direct investments cause the disagreement between two main groups. The first group with higher tax rates oriented positively to tax harmonization. The second group, consisting of newly accepted countries and Ireland with lower tax rates to support FDI and thus economic growth, express total denial to any harmonizing. Taking the US model with a different view, tax harmonization should be a process stretching over a couple of years, presumably a couple of decades if we're looking for Pareto optimal approach from the point of the European Union as a whole. In my model, Pareto optimal situation represents continuous process where some countries are already prepared for harmonized system and they would benefit from it. The rest of the countries would lose the only economic advantage that attracts investors. The model proves that only anticipated process could bring the best outcomes approaching Pareto optimum. Shock-based economic decisions would harm the market and it would be multiplied by financial crisis.

Fiscal Sustainability of the Public Healthcare System
Ľuboš KUCHTA
University of Economics in Bratislava

Did health reform in Slovakia change the outcomes in the right way? Slovakia tried to reform its healthcare sector full of old obsolete characteristics of old political system in 2003. Before 1989 there was a fiction created that some services for citizens are free of charge.

The previous Cabinet established some market conditions. Small user fees were introduced in 2003. The industry regulator was establishment with a competence of "cash back" mechanism. The reform brought profit motivation to the insurance funds by converting them into joint-stock companies, thereby strengthening their incentives to seek cost effective provision.

The current Cabinet, on the other hand, annulled most of it. Transformation of hospitals to joint-stock companies, aimed at loss limitation, was put on hold. Furthermore, private cash payments were abolished and profit to private health insurance funds was forbidden.

For this kind of changes, it is important to know how much would the newly built or completely rebuilt institutions or mechanism affect the current existing system and if the influence would go the right expected direction.

This study will analyze the effects of reform actions on the behavior of healthcare providers, insurance funds and patients. The aim is to measure the outcome changes and identify whether they contributed to fiscal sustainability of public healthcare system.

Economic and Political Determinants of Income Inequality
Zlatko NIKOLOSKI
University College London

The first essay of my doctoral dissertation is an attempt to further the knowledge in the area of income inequality and its determinants. The chapter itself adds to the existing knowledge in several important ways. Firstly and crucially in view of the complexities of the relationship between income inequality and its determinants, the chapter employs system GMM techniques in order to deal with some of the recurrent problems of empirical research in the social sciences, such as unobserved heterogeneity and endogeneity of the regressors. Secondly, in employing this approach, it introduces exogenous instruments for democracy and regime type in general to the system GMM estimates. Thirdly, it analyzes a comprehensive set of theoretically motivated channels through which inequality determinants impact the level of inequality and in so doing explores some interesting interactive effects.

We argue that there is a dynamic effect in determining the level of inequality. In addition, we posit that natural resource abundance, the level of economic growth and GDP per capita as well as openness to international trade flows are crucial economic determinants of the levels of inequality. In addition, we find evidence that industrialization decreases inequality and that financial sector development increases income inequality in the shorter run. Finally, we do not find any evidence that democracies are associated with lower levels of inequality and more egalitarian distribution of income. We also control for a few interaction terms (between natural resource abundance and growth, and natural resource abundance and democracy) which confirm our general findings. Hence, in public policy choices that involve income inequality, more importance should be given to the economic determinants of income inequality.

Crisis of the Brazilian Firms: Business Reorganization as Strategic Decision
(A Game-Theoretic Approach)
Fernando César NIMER MOREIRA DA SILVA
University of São Paulo

Are there enough incentives to reorganize a distressed firm, according to the new Brazilian Bankruptcy Law? (BBL – Law n. 11.101/2005)

Brazilian legislators and policymakers claim that the new bankruptcy law is capable of reorganizing a distressed but efficient firm, and of liquidating an inefficient business. The policymakers claim that the law is a well designed mechanism that reflects the public interest, because it increases the quality of the market and allows the preservation of firms and jobs, therefore reducing the cost of money in Brazil.

The new law creates incentives to debtors and creditors, altering the distribution of gains and influencing the strategic decisions adopted by the agents. BBL introduces the possibility of reorganization of firms, giving the creditors the final word about the future of the distressed business, but also creates room for opportunism of all agents.

The individual, collective and public interests are not aligned, and the law is not capable of avoiding type-I errors (reorganization of the inefficient firm) and type-II errors (liquidation of the efficient firm).

The main problems created by the law are related to: 1) adverse selection of firms: the law increases the occurrence of type-I errors; 2) difficulties in revelation of information, specially about the value of the firm; the debtor knows more about the firm that the creditors and the judge, and he privately owns the data necessary to making decisions; 3) the creditors' committees are a sequential game with incomplete information that negatively impacts the majority of creditors' classes, allowing the influence of control groups in creditors' committees; the creditors' classes are not homogeneous: senior creditors can vote in more than one committee, junior creditors need to use a "strategic delay" approach to retain some gain, and the firm's workers tend to vote in favor of the reorganization to save their jobs; 4) the law permits the redistribution of gains after voting, increasing the uncertainty for all creditors; 5) finally, BBL ignores the indirect effects cause by reorganization, affecting the community not directly involved with the procedure.

A game-theoretic model was created to analyze the main incentives, constraints and strategies that can be adopted by the players. The solutions recommended by the model are compared with the alternatives presented by the law. There are three strategic possibilities: i) private negotiations (workouts); ii) liquidation; iii) reorganization of the firm.

The best strategy to the efficient firm is to avoid the BBL proceedings at all costs, or to propose a reorganization plan with high payment of credits. For the inefficient firm, the preferred strategy is to bargain and try to transfer risks to creditors, proposing a reorganization plan with low payment.

According to Mechanism Design Theory, we can argue that the law is not an "incentive-compatible" direct mechanism, it does not function as a complete "message center" and it does not follow the basic rules of Implementation Theory. As a consequence, BBL is not entirely capable of delivering the promises made by the policymakers.

An Agent-based Model of Price Adjustment
Grace Tan ONG
University of the Philippines School of Economics

How does a completely decentralized economy composed of millions of mainly self-interested people coordinate their actions? Walras and Marshall both patterned their models of the market on existing institutions: the Paris Bourse and the London Stock Exchange (Kregel, 1995), both of which are actually organized markets that use double auction. We have therefore had to resort to a fictitious auctioneer or an invisible hand when we generalize more broadly to markets that are not so organized. Saari (1995) points out that no mathematical theory exists to justify our faith in the efficient working of the market and he traces this difficulty to the aggregation process over many different individuals.

One approach to the problem is to use agent-based modeling to explore how emergent market behavior arises from many individuals interacting at the local level. I use Netlogo (Wilensky, 1999) to build a two-good model with buyers and sellers matching up randomly, only sellers reveal their prices, and the decision of whether trade occurs or not depends on the buyer. As Duffy (2006) indicates, with minimal assumptions on individual learning, the emergent behavior is largely dictated by institutional features and constraints on trade. Except in situations where agents are unable to change (e.g., the time is too short), realistic learning behavior quickly becomes an important point. Also, institutions themselves might arise from the need of the individual agents to better manage information, resulting in matching rules that are not so random. Learning rules and matching rules are areas where more work needs to be done.

Entrepreneurship and Economic Growth of Ukrainian Regions
Khrystyna PAVLYK
Ivan Franko National University of Lviv

To verify the assumption that institute of entrepreneurship is one of the pillars of economic stabilization and permanent growth, the study covers two previous decades marked with two periods of immense instability in Ukraine. The paper discusses changes in the number of companies in Ukraine between 1990 and 2010, as well as its correlation with indicators of economic growth.

Preliminary results show that institute of entrepreneurship helped to shorten the transitional stabilization lag in the Western regions, even though all regions were exposed to the common national transitional policies. The second period of instability is entailed by current global economic slowdown. Even though all Ukrainian regions are suffering from the economic crisis, the Western regions are showing higher levels of resistibility to economic vulnerability. Based on the analyzed data, the paper will conclude on the importance of the interdependence between entrepreneurship and economic stability, as well as provide policy recommendations on the stimulation of entrepreneurs' activity and cross-border cooperation as a way to promote economic growth of Ukrainian regions.

Russian Student Loans: Dead or Alive?
Ilya PRAKHOV and Gregory Andrushchak
State University Higher School of Economics

The Russian system of higher education is rather unique: the so-called 'dual-track' policy comprises both students who have to pay tuition fees and those who study for free. Besides, higher education is provided both by public (state) and private (commercial) institutes and universities. Even in the public universities more than a half of the students have to pay tuition fees for their education. At the present time Russian system of higher education faces a problem of accessibility. Hence, it is necessary to work out and implement special mechanisms which aim at increasing the attractiveness and affordability of higher education for students from different social groups. Student loan is exactly that sort of funding instruments.

The institution of student lending functions well in developed countries: student loan is widespread mechanism of funding higher education. However, this institution is new for Russia, and there are certain problems with import of this institution. The mechanisms of student lending are still not widespread here, but regardless the novelty of student lending, according to the data of the Monitoring of higher education, more than a half of the households are ready to take a credit if they would have to pay tuition fees in the university. Thus, we face a dilemma: on the one hand, households do not use student loans because of their expensiveness; on the other hand, households are willing to take a loan on favorable terms. Consequently, there is a need for analysis of the potential demand for student loans, aimed at identification of appropriate student loan conditions for the households.

The purpose of this study is to outline the main reasons for underdevelopment of this institution in Russia and to define the potential demand for student loans. We will focus on the assessment of characteristics, which would make this type of loan more suitable for Russian students. The available data was obtained through the interviews with 1600 school graduates going to enter the university and their parents. The results of linear and quintile regression analysis concerning the evaluation of the potential demand for student loans will be presented and discussed.

Incentives for Institutional Creation in Natural Resource Management
Brian E. ROBINSON
University of Wisconsin

When do communities decide to self-regulate their use of local natural resources? To justify such collective action, the benefits must outweigh the transaction costs of creating, implementing and adapting institutions. This study will investigate communities' incentives to engage in collective action over a wild non-timber forest product (NTFP) in southwest China.

Many residents of NW Yunnan harvest matsutake mushrooms in their village's collective forests. Mature mushrooms, about 5-10 days old, bring in about $15 USD/kilogram while young matsutake can only be sold for roughly $5/kg. Mature mushrooms are therefore more profitable because they sell for a higher per-weight price and they weigh more, making the average revenue from mature matsutake 6 times greater than immature matsutake. Without rules to regulate harvests, competition often results in the collection of immature mushrooms, greatly impacting total profits. Yet only some villages regulate harvests in ways that better allow mushrooms to grow to maturity (e.g. through "rest" days, rotating group harvests or privatizing forest plots).

A simple NTFP harvest model with explicit age-cohorts is developed which shows that the probability distribution of harvested matsutake ages implies a comparable measure of normalized harvest revenue across villages. Comparing harvest distributions from a common-property forest and privately managed forests gives an estimate of the potential revenue gains from institutional development, and represents at least what a village should be willing to "pay" for the transaction costs of collective action (actual gains would be more since less harvest labor is needed with management, decreasing the cost of harvesting). With this information and village histories of matsutake regulation, we can begin to posit possible reasons for villages' success, failure or disinterest in creating institutions.

I will collect data from approximately 15 villages from July-September 2009, sampling villages with the greatest harvests to help control for natural mushroom productivity. I will intercept harvesters in village markets, measure their mushrooms and conduct structured interviews. About 5 sites' forests will be privately managed household plots. Other villages will be selected for their productivity and common-property management (that is, no institutional arrangements exist except exclusion of non-villagers) of harvests.

European Local Government Systems: Institutional approach
Miklós ROSTA
Corvinus University of Budapest

My research focuses on local government systems of Central-Eastern European countries, especially Poland and Hungary. The institutional arrangement determines the performance of newly established local government systems in Central-Eastern Europe. Without having deeply analysed local government systems of Soviet regimes, a sophisticated assessment about local government systems of the post-socialist countries could not be legitimately established. Thus, to understand the process of transformation and features of the finally attained local government systems, institutional changes of these countries is in the focus. Using the system-paradigm as the main approach of this research, it is highly desirable to carry out a dynamic analysis of local government systems, rather than focusing on static statuses. One of the hypotheses of this research is the following: the spontaneously developed institutions of the soviet type local government systems are decisive after the establishment of the deliberate institutional arrangement of the democratic local self-government system.

Further information can be gained about institutions through canvassing local governments not only on the system level, but also on the organisational level. As long as Eastern-European local government systems are thoroughly influenced by the institutions of the former socialist system, it is difficult to suppose that organisations – from which systems are built – would operate like their Western-European peers. This has a particular effect on using performance management tools to increase efficiency and effectiveness of local organisations (local councils, local service providers, local institutions, etc.) and to affect the local government system in the same way as a whole. Therefore, performance management tools, which are considered to be highly effective in Western-Europe, could have a backfiring effect in Eastern European countries. As an example, local holdings of service providers can be mentioned, which are usually convincingly effective in Western Europe, while in Eastern Europe they might well be the hotbed of corruption. In my research I examine and compare the effectiveness of the applied performance management tools in the light of the third hypothesis in Western European countries (especially in Germany, France, England and Sweden) and in Eastern-Europe (Hungary and Poland).

Anatomy of the Thai Bankruptcy Law:
An Econometric Approach using Panel Data
Supruet THAVORNYUTIKARN
Thammasat University

This paper empirically investigates how the Thai Bankruptcy Law, amended in 1997 to incorporate reorganisation, distinguishes and selects insolvent firms to be reorganised. From the law and economics point of view, ill-fated companies shall be reorganised if and only if they are ex ante economically efficient but were unexpectedly insolvent. Otherwise, it would serve as incentive for companies to be ex ante inefficient. Firms would seek for reorganisation to evade their creditors which consequently derogate creditors' expectation and constrict the credit market.

It is expected, initially, that the Thai Bankruptcy Law and institutions related to it, namely, the Central Bankruptcy Court, shall have some elements to measure and detect firms' efficiency; at least significantly differ from what creditors use to assess their risks. The paper aims to discover factors underpinning the structure of the law and institutions whether it is compliant to economic rationale.

Using the panel data of firms petitioned for reorganisation between 1997 and 2001, probit, logit, and multinomial logit estimation were employed. The extension to cover newer data is expected. The factors affecting the success in reorganisation are not conforming to the economic criteria of efficiency. Most of them were reorganised by the similar criteria already used by their creditors. Hence, it is irrelevant to have a specialised court to perform the task which creditors can do. By inference, insolvent companies were strategically using the law to prevent themselves from creditors.

Moreover, it is discovered that institutional factors specific to Thailand are significantly affecting the probability of being reorganised, including when firms have 'influential' persons as shareholders or directors. Being 'Influential' mean persons of high prestige in the Thai society – very well known, i.e., rich, descendants of Royal, and high-ranked civil servants and military. Thus, this Law is economically inefficient and further amendment is required.

The institutional framework and environment must be thoroughly considered before amendment is made. It is essential to understand country-specific characteristics and people's behaviour to design the mechanism of law that promotes efficiency. A universal and standard model of bankruptcy law would only reduce the transaction cost of cross-border insolvency but not efficiency.

Rape in Thailand: Economic Approach
Angsuthon THUANNADEE
Thammasat University

This study applies an economic model of crime to explain the incidence of rape in Thailand. The model is adapted from the economic model of criminal behavior originally proposed by Becker's (1968) path-breaking theoretical work and later Ehrlich (1973). In the rational offender framework, a potential offender commits crimes when the expected benefits of offending outweigh the expected costs. Becker considers a supply of offence function where crime rate is a function of the probability, severity of punishment, and other factors.

This paper analyses the behavior to commit rape in Thailand from the perspective of law and economics, focusing on the simple model of the supply of offense function. In the model, the rape rate is postulated to depend on the probability of arrest, severity of punishment, socio-economic factors including real income, unemployment rate, poverty index, and education rate, demographic and other indicators. In the empirical part, time series data from 1988-2007 in Thailand are used. The study will also analyse the effect of a process of judgment on supply of offense function or rape rate, and the effectiveness of law enforcement by studying the government execution in rape charges. In addition, I scope the problem to the specific question is "what is the bribe price to get the police to drop a rape charge in Thailand?". Finally I will assess qualitatively the economic cost of crime and the bribe price using an in-depth interview with the victims and the police.

Statistics on rape in Thailand 1988-2007 reveal that rape is a very seriously problem and requires systematic attention. Generally in Thailand this problem will be the concern of academia in psychology, sociology or jurisprudence as well as the NGOs. But in the field of economics, such interest remains limited. I aim to use the economic approach to explain this social problem and hope that my work will shed some light on the understanding of the causes of high incidence of rape as well as some policy implications.

The Effects of Vertical Integration on Auction Outcomes in the EU and US Electricity Markets
Silvester VAN KOTEN
CERGE-EI

With the deregulatory reforms in the electricity industry, stages of production have been split up and are performed – typically – by different companies that compete for inputs and/or customers in decentralized markets. In such markets goods are often sold by auction. As the extant EU and US regulatory frameworks allow integrated electricity holding companies to have ownership of firms active in generation, distribution, and transmission, these holding companies often own both the seller and one of the buyers in such decentralized markets. A holding company that owns both a buyer (called the integrated buyer) and the seller in an auction has distorted bidding incentives. Specifically, the holding company will make the integrated buyer bid more aggressively to increase auction revenue. As a result, the integrated buyer is more likely to win the auction and the good is sold for a higher price. This results in a decreased efficiency of the auction. Moreover, independent companies are less likely to win the auction, and, in any case, pay a higher price.

Make or Take: Effects of This Conflict on Land Ownership in Brazil
Flavia Santinoni VERA and Ronald Otto Hilbrecht
Brazilian Federal Senate and ICER Fellow

Historically Brazilian constitutions have guaranteed property rights as one of the most important institutes of that legal system. Nevertheless, excessive restrictions on property rights emerge from: a) abstract concepts such as the "social function of property rights" applied by imposing malformed indexes of productivity; b) unclear allocation of property rights; c) biased and unjustified expropriations; and d) a lack of consciousness on the part of policy makers of economic analysis of law.

Accordingly, the restrictions on property rights increase transaction costs, reduce incentives for production, and evidently deter latent potentiality of further economic growth. Also, the original goals of these public policies often create distorted effects. In fact, there is an unclear understanding by policy makers, legal professionals and legislators of the effects of alternative forms of ownership property rights.

Hence, we intend to carry out an original investigation on the economic consequences of the neglect of the economic analysis of property rights by legal professionals in Brazil. We aim to analyze the restrictions on property rights that are justified as redistribution and social policies, and our focus will be the use of indexes of productivity to motivate expropriation of land.

The research will start by a view of the underlying institutional framework and by explaining how the indexes of productivity are used to mitigate a vigorous system of property rights. Its consequences to efficiency of resource allocation will also be analyzed. It is often said that the best productivity measure is one that compares output with the combined use of all resources. Unfortunately, the indexes used in Brazil to justify expropriations of land are not based on a broader coverage of resources. In this sense, the study will seek to assess productivity measures that compare output with different combinations of resources and other available data to support the findings. The possible vagueness or lack of relevant official information relative to the effects of these policies will also be considered. Moreover, comparative studies should complement the research to show if other countries use laws or public policies to impose indexes of productivity to property rights.

Analysis of Marketing Behavior of Smallholder Banana Growers
in Southern Ethiopia: An Institutional Economics Perspective
Getachew Abebe WOLDIE
University of Giessen

High-value crop producers in Ethiopia, as in many developing countries, often live in villages located in remote areas. They are hardly integrated to national and international markets because of high transaction costs, poor roads, and information asymmetry and other market imperfections. Integration of such smallholder peasants into the exchange economy is usually regarded as the most important task for boosting growth, accelerating economic development, ensuring food security, and alleviating poverty. But the fact is that designing leveraged intervention measures that help the growth of income of smallholders in the sub-sector requires detailed understanding of the existing production and marketing structures. The role of information and transaction costs in improving the bargaining power of smallholder producers and analyzing existing potential opportunities and identifying key intervention points are particularly important.

Using the New Institutional Economics framework, particularly Transaction Cost Economics, this study sets forth an empirical analysis of the transaction costs related to search, negotiation, and monitoring and enforcement of contracts in the banana market in Ethiopia.

In the current study due emphasis is given for the following research questions:

What kinds of transaction costs are important in affecting smallholders' bargaining power and marketing decisions?

How the depths of marketing method smallholder's use affect the revenue generated from their produce?

How asymmetric information that leads to high transaction costs, affects bargaining and in turn the net price farmers received?

What are the roles of institutions in the banana market structure?

How policy intervention towards public investment in infrastructure, education and information, and promotion of cooperatives are important in reducing transaction costs?

Regulating Precontractual Opportunism with Invalidity of Contract
Qi ZHOU
University of Sheffield

Precontractual opportunism is characterised as fraud, duress, exploitation of bargaining power, the party's unilateral mistake or incompetence by which the actor intends to induce another party to make a contract, or to force him agreeing on unconscionable terms. Not only can opportunistic behaviours lead to misallocation of resources, but also generate real social costs in terms of time, effort, and resources wasted on such behaviours.

In contract law, a contract induced by an opportunistic behaviour is either entirely or partially unenforceable. In brief, three legal outcomes ensues that I call in this paper as invalidity of contracts: (a) void contract - no valid contract ever exists; (b) voidable contract – the contract is valid until rescinded by the aggrieved party; (c) void term – except for the unfair term, the rest of the contract is still enforced.

In this paper, I apply a law-and-economics analytical framework to examine invalidity of contracts as a legal instrument to regulate precontractual opportunism. The objectives of the paper are twofold. Firstly, it is intended to identify economic features of invalidity of contracts, e.g. efficiency characteristics, economic costs, and impact on the incentive structure of contracting parities. And then some normative implications will be drawn of how the optimal regulation of precontractual opportunism can be achieved by the use of invalidity of contracts alone and in combination with other legal instruments such as damages in tort law or public law sanctions, e.g. financial penalty or imprisonment.

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