Ronald Coase Institute



2009 Xiamen Workshop: Abstracts



WORKSHOP ON INSTITUTIONAL ANALYSIS
DECEMBER 13-19, 2009
XIAMEN, CHINA

ABSTRACTS

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Under What Conditions Will External Pressure Lead to Successful Reforms?
Anna Lou ABATAYO
University of the Philippines - Diliman

The Philippines has witnessed countless attempts at government reforms, some successful, some not, while others suffer the fate of indefinitely extended implementation. One success was the lowering of trade barriers in the Philippines resulting from pressure exerted by other member countries of the World Trade Organization. On the other hand, the Comprehensive Agrarian Reform—aimed at giving land to landless farmers to alleviate poverty—seems doomed to failure. In the third category are reforms that, if not planned well, may get bogged down by discussions that go on indefinitely. The upgrade automation of the Bureau of Internal Revenue and the creation of the Philippine National Electronic Window to create a major information-sharing network for customs and shipping port agencies could go the way of this last category. What goes into the successful implementation of reforms?

This paper posits that under particular conditions, external pressure will lead to reform and, in many instances, to better implementation of reform. Our study focuses on reforms that were implemented with external pressure and without it, with attention given to the length of time taken to implement the reform, the key players, their respective strategies and the power plays among the players, and the effectiveness of the reforms following their implementation.

Literature on the conditions under which external pressure would bring about a successful reform in a particular country is scarce. This paper hopes to address this lack of information by shedding light on why many reforms that have successfully been implemented seem to owe their success to external pressure as a major component.



How Would Lifting the Investment Restrictions of the Philippine
Social Security Fund Affect its Financial Performance? 
Stephanie Loo CHAN
De La Salle University - Manila

The social security system (SSS) of the Philippines was last revised in 1997 by a legislative act.  It covers the establishment of the administrative body of the fund, details of contributions and benefits, as well as investment restrictions.  Currently, the fund may invest no more than 7.5% of its total reserves in foreign stocks and bonds, while it can invest no more than 40% in domestic stocks.

However, financial statements of the SSS reveal the significant role that investment income plays as a buffer for benefit payouts.  The changing demography of the country, coupled with the perceived loss of viability of the social security fund, shows that there is a need to examine the possible gains or losses from loosening investment restrictions.
 
To answer this question, the risk-adjusted return of a portfolio that follows the prescribed restrictions will be compared to the risk-adjusted returns of a set of portfolios with slowly increasing allocations to foreign stocks and bonds.  Preliminary results show that for some years, higher allocation of assets to world stocks and bonds provides higher returns per level of risk, which translates to higher net income of the fund and a slightly longer actuarial life.  Though this needs to be studied in more detail, it provides evidence that the investment restrictions may not be in the best interest of the SSS fund given its current situation.



Political Institutions and Foreign Direct Investment Flows
into Developing Countries
Devrim DUMLUDAG
Bogazici University, Istanbul

The major focus of this paper is on the relationship between political and economic institutions and foreign direct investment (FDI) in developing economies. For a decade, the relationship between institutions and foreign direct investment has been receiving growing attention. The link between the quality of institutions and FDI in developing countries, especially in transition economies, has led scholars to focus on the quality of institutions as determinants of FDI in developing countries.

This paper explores how economic and political institutions help explain cross-country variations in foreign direct investment flows by applying panel data regressions including 67 developing countries for the period 1984-2005. The econometric model includes two approaches; factor analysis and principal component analysis.

The findings suggest that better perceptions of the quality of institutions have overall a positive and economically significant effect on FDI. Especially, the unpredictability of laws, political and economic instabilities, government instability, and high level of corruption play a major role in deterring FDI.



Internationalization: A "Life-Belt" for Modern Higher Education Systems
Galit EIZMAN
Council for Higher Education, Israel

In recent decades, a growing number of countries have faced the phenomenon of massification of higher education, as reflected in the growing numbers of applicants, students, and institutions of higher education. One of the principal challenges is that the demand for higher education in most countries has increased more rapidly than the ability or will of governments to provide the necessary public resources to meet this demand.  Many public academic systems have been brought to a threshold of crisis threatening the quality and achievements of research and teaching.

This situation might get progressively worse: the demand for higher education will continue to increase, and even privatization of higher education won't be able to cater to the needs and demands of society for higher education without suitable public budgets. One of the main solutions proposed is the internationalization of higher education systems. A global academic system, wherein each country promotes selected fields of study and research, could benefit everyone.

According to Ricardo's basic 19th century model of international trade, trade brings an economy to a higher level of consumption possibilities due to specialization and comparative advantage. Following the internationalization of trade in goods and products and the international trade of financial capital, trade has now become a main channel for promoting the benefits of knowledge and higher education.

The current situation in the Israeli higher education system can serve as a test case to demonstrate this theory. The general level of Israeli universities is relatively high but, due to severe budget cuts in recent years, quality parameters, such as students/staff ratio or recruitment of young academic staff, are declining. In international rankings (THE, SJTU) the level of Israeli universities according to research parameters is high, but the level that reflects student and staff mobility is very low. This paper shows, by economic theoretical and empirical tools, that a significant increase in these parameters, through the promotion of programs for student and staff exchanges and academic cooperation, will bring academic and financial benefits to higher education systems and will be a "life-belt" in a time of crisis.



The Impact of Liquefied Natural Gas
on the Southern Cone’s Energy Integration
Roberto Pougy FERREIRA DA CUNHA
Federal University of Rio de Janeiro

Gas integration efforts in the Southern Cone presented evidence that long-term take-or-pay gas contracts between two national states only align both parties’ interests until the flow of gas has reached the pipeline’s saturating capacity. At this point, self-enforcement ceases to exist and, in the absence of an external dispute settler, one side deviates. Such contracts between Bolivia and Brazil, Argentina and Brazil, and Argentina and Chile were firmed in the 1990s and broken by the suppliers, Bolivia and Argentina, during the 2000s. Brazil and Chile shifted long-run plans to the construction of liquefied natural gas (LNG) regasification plants.

When a government unilaterally breaks firm commitments established by its predecessors, the institution of the national state is deemed questionable. Future governments of Bolivia and Argentina, trying to redeem the opportunity cost of not exporting more of their abundant natural gas reserves, will face the consequences of previous unilateral deviations. Fearing another holdup, the private sector refrains from investing, halting an important enrichment route for two developing countries.
What solutions can institutional economics provide to reestablish long-term trust in the Southern Cone region? How can Bolivia and Argentina overcome this institutional barrier and retake the region’s gas market? Assessing these issues, this paper argues that, unable to engage in long-term contracts, Bolivia and Argentina should enter global LNG markets on the supply side, Bolivia exporting through existing pipelines in Argentina, integrating the exporting interests within the region.

The opportunity to sell or buy in the global markets, combined with geographical proximity, induces both sides within the region to trade LNG under one-off short-term self-enforcing contracts, with prices fixed at the international level, sharing the savings on transportation costs. But once with the opportunity to trade natural gas between neighbors through liquefaction, countries are induced to shift the transportation method to cheaper existing pipelines, under the same contractual framework.

Thus under this model, building a liquefaction plant in Argentina induces the same gas flows countries once tried to achieve through long-term take-or-pay contracts. This arrangement leads to the economical exploitation of natural gas resources with reliability, causing the re-launch of the energy integration process in the Southern Cone region, currently stalled.



Coastal and Marine Resource Management in the Philippines:
An Analysis of the Political Economy
of Selected Local Government Units Initiatives
Alice Joan G. FERRER, Agustin Arcenas, and Joseph Capuno
University of the Philippines - Visayas

Economic theory suggests that local government units (LGUs) are unlikely to co-manage their coastal or marine resources. The reasons are free-riding, inability of the local chief executive to appropriate the political payoffs of the delayed benefits from such activities, and the transaction costs of building a consensus among various stakeholders. And yet the reality is that such arrangements are found in Iloilo Province and other places in the country. Given that a significant portion of the population depends on the seas, lakes, and rivers for food, livelihood, and even recreation, the efficient local management of these bodies of water is paramount to social welfare, and therefore an important policy concern.

The current research project seeks to answer the following questions:
What are the factors behind the formation and sustainability of inter-LGU collaborations in coastal or marine resource management?
What policy instruments can be used to replicate, strengthen, or promote such arrangements?

These questions are being answered based on a case study of two groups of LGUs in Iloilo: one group of two municipalities (Barotac Viejo and Banate) with formal co-management arrangements, and a comparison group of two LGUs (Dumangas and Zarraga) without such arrangements. A combination of a small-scale survey with the fishers, interviews of key informants, focus group discussions with residents of the communities, and extensive field visits is being undertaken. Statistical techniques, including regression analysis where applicable, will be employed. The study started in January 2009 and is expected to end by November 2009.



Institutional Determinants of International Technological Diffusion:
The Case of Electronic Ticketing among Airlines
Roberto GALANG
Asian Institute of Management

This paper investigates the institutional factors that affect the international diffusion of beneficial technological innovations across firms. The propensity to invest in an unknown technology is strongly influenced by state governance through four institutional mechanisms: contract enforcement, property rights, uncertainty, and ownership. The absence of clear contract enforcement processes and well-defined property rights discourages investments in technology, due to the difficulty in allocating the residual surplus gained from productive assets and to the risk of their later expropriation. Institution-driven uncertainty increases the challenge of avoiding contractual hazards, requiring greater experience and learning when undertaking investment decisions. State ownership encourages multiple and often competing firm goals that diminish the incentive to promote technological improvements.

To better understand this relationship, I utilize the case of electronic ticketing by airlines. Electronic ticketing is the most critical tool for cutting costs in the airline industry, potentially saving the industry approximately US$3 billion annually. Moreover, e-ticketing ensures easier handling of itinerary changes, obviates the inconvenience associated with lost tickets, and provides airlines with the ability to make effective use of the Internet.

For airline e-ticketing implementation, state contract enforcement is particularly relevant given that e-tickets depend on contracts that involve no physical paper documents as proof of agreement between parties. In essence, e-ticket contracts are bound by “click-wrap” agreements wherein mere indications by the buying party to assent to the terms offered by the seller are sufficient to conclude a contract, with no need for paper exchanges or signatures.  On top of this, the enforcement of such contracts in cases of dispute is made more complex by issues of legal jurisdiction and the need to modify customer behavior.

Using a unique dataset consisting of more than 180 airlines operating in 120 different countries, my preliminary analyses indicate that controlling for firm- and industry-specific factors, state governance characteristics - especially contract enforcement - have a significant impact on the pace at which individual airlines adapt the e-ticketing technology.  However, I also find that state ownership of firms does not significantly affect the pace of technological diffusion.



Institutional Analyses of China’s Hospital Sector Reform
Jingwei HE
National University of Singapore

China’s healthcare policy had been subject to heated debates for nearly a decade before the new national reform was unfolded this year. In the rich literature on its hospital sector reform, most studies focus on explaining the determinants of perverse incentives prevalent in Chinese public hospitals and their implications for efficiency, quality, and equity.  Such studies largely neglect the fact that the hospital behaviors are not solely driven by economic incentives but also by the government, although this visible hand often proves unsuccessful. Hence, how the political power manages the incentives of the hospital behaviors is central in delineating a complete picture of China’s hospital sector in transition. Moreover, not clear either from the literature is the government’s incentive structure in regulating the health sector. In other words, why the government —both as a monolithic actor and as a fragmented bureaucracy—manages the health sector in this manner is the other side of the same coin.

 This doctoral thesis mainly employs institutional analysis in examining the institutional configurations pertinent to China’s hospital sector and further analyzes the government’s role in designing or shaping these institutions. This thesis does not follow the economists’ conventional way in explaining grassroots day-to-day behavior by analyzing the impact of health care financing regime, provider payment methods, etc., but attempts to answer how the political mandate from the government is transmitted to the very front line. Furthermore, this thesis rejects the efforts of marrying the theory of soft budget constraints to Chinese hospital behaviors as shown from the recent literature.

After a historical review of how did the pertinent institutions evolve to what they are now, the author will use cases of local initiatives of hospital privatization and urban two-way referral system as illustrations. 



Do Women Control Income in Left-Run Municipalities?
A Study of Self-Help Groups in Urban India
Zakir HUSAIN
Population Research Center, Institute of Economic Growth, Delhi

This study examines whether members of women’s self-help groups have more control over income from their groups’ activities in left-controlled municipalities or in opposition-run municipalities.

In India, the Golden Jubilee Urban Self-Employment Programme is one of the most important poverty alleviation programs. This program seeks, inter alia, to mobilize poor women residing in urban slums and encourage them to form self-help groups. These groups undertake income-earning activities, the profits of which are shared by members. This profit is substantial and comprises about 15-20% of family income.

 Now, an important issue centering on this income is, who decides how this income will be spent – the member, her husband, or both of them jointly? The answer is important as it indicates the level of empowerment of self-help group members.

We have examined this issue based on a field study of 240 self-help group members in 6 municipalities in West Bengal, a major state in India. West Bengal has been chosen because its long history of left control (since 1977) is unique in India. During this period, the opposition consisting of the Indian National Congress and Trinamool Congress has been almost wiped out from the political scenario of the state.
Analysis of our data revealed that 69% of respondents in left-run municipalities controlled income, compared to only 35% in the two municipalities run by the Indian National Congress. Statistical tests (t- and non-parametric tests) confirmed that this difference is statistically significant, while results of an ordered logit model revealed that the difference remained even after controlling for variations in socio-economic characteristics.

We argue that this finding may be explained in terms of the differing nature of the two political parties controlling the municipalities. While the Indian National Congress is a loosely run political party based on the principles of voluntarism, the left parties are regimented and have a rigid hierarchical structure. They also call for active political participation from their supporters – in the form of regular participation in processions, demonstrations and propaganda activities. This leads to greater political participation and, in the case of self-help group members, increases their awareness and aspirations. This spills over to the household sphere, where women bargain for a greater control over financial resources.

Econometric results confirm that political participation is higher in left-run municipalities and results in a greater level of control over the income from self-help group activities.



Solving Under-compensation for Rural Land in Chinese Land Expropriation:  Is Privatization Necessary?
Ziming LI
Wuhan University

In urbanization, the Chinese government expropriates collectively owned rural land and then sells the use right to developers. As the land finance system and publicly owned economy, peasants gain under-compensation but they have no power and no legislative support to demand the true value and benefit from the land they once managed.  Definite ultimate landed property of Chinese would hardly be transformed into private ownership, as it may involve the heated debate of ideology, which may put off the solution to the conflicts in reality.

Therefore, it is necessary to evaluate the institutions from the scope of endogenetic transaction costs when we take internal coherence of justice and efficiency as individual’s behavior assumptions. This papers unpacks land development rights according to a variety of usages for participants both in urban and rural areas, and builds up value equilibrium in a given property rights exchange market, which is a benchmark to reveal the hidden relationship of improper behaviors in the land conversion and evaluate how big is big of under-compensation. As the corner solution of land use in reality, it introduces infra-marginal analysis of New Classical Economics and values the proper structure of property rights among autarkic, pure specialized, and mixed patterns when the rural households, rural collectives, and urban developers’ bargaining power vary. Finally, using a case study of rural land circulation reform in Wenjiang, Chengdu, in China to confirm the alternative way of property rights exchange, it makes a deduction concerning the dialectical relation among the internal coherence of efficiency and justice, the endogenetic transaction costs and institutional change, which also shows the direction of Chinese land reform. Above all, it would give a lesson to the Chinese transformation of land property rights and the promising land development rights market in the future.




Do Village Elections Select More Competent Leaders?
Meritocratic Selection in China's Grassroots Democracy
Mi LUO
Peking University

This paper asks empirically whether village elections in rural China select more competent leaders, using a unique national representative sample of 246 villages from 29 provinces from 1982 to 2006. Recent literature has demonstrated robust evidence that leaders’ quality, competence, and honesty do matter for economic performance, yet there is no systematic study regarding how to select competent leaders in the first place.  My study aims to bridge this gap by looking at the competence perspective.

To be specific, I look at whether the introduction of village elections with open nominations improves the profiles of elected village committee leaders, as measured by educational attainment and pre-election managerial background. Careful empirical tests using either measure under both two-way fixed effects and ordered probit specifications consistently demonstrate a significantly positive effect.  There is almost one more year of schooling in terms of education, along with a doubled probability that the elected leaders come from a managerial background, compared to the baseline results. Potential endogeneity – either from simultaneity between open-nomination elections and elected leaders’ competence, or potential feedback from profiles to adoption of elections on the village level – is treated using a quasi-shock subsample yielding exogenous variation in the introduction of such elections and instrumental-variable approach.  The effect of elections is still significantly positive after these treatments. I argue that the open-nomination elections reflect a meritocratic selection procedure, by showing evidence that not only has the pool of candidates been improved, but also the election procedures are fairer. The alternative story of elite capture is also looked at, but rejected with ample counter evidence.

The most important message that this paper tries to deliver is that given that such an institutional change could yield such positive effects, it might be beneficial to further popularize, rather than disqualify, the implementation of elections in the countryside of China.



Where Entrepreneurs Meet Government Bureaucrats: Weak Property Rights, Strong Political Connections, and Growth of the Private Sector in China
James Kai-Sing Kung and Chicheng MA
Hong Kong University of Science and Technology

A puzzling feature of economic transition in China is that, despite an inadequate protection of secure property rights, the private sector has experienced sustained growth in the economy’s ongoing transition. Drawing upon a unique survey of private enterprise owners, we show how they respond to discrimination against them in having equal access to key resources and to the high transaction costs of doing business by developing political connections with government officials. Specifically, the weaker the property rights, the stronger the political ties that owners of private enterprises have tended to cultivate. To the extent that the discrimination against private enterprises varies positively according to the predominance of public enterprises in a region, we instrument property rights, which is endogenous, by the regional distribution of mineral resources—a variable that affected the choice of location of government-owned firms in the 1950s but is not correlated with the number of friends in the government.

Keywords: Property rights, political connections, private enterprise growth, mineral abundance



Land, Household Selectivity, and Rural-Urban Migration in Hinterland China
Lei MENG
Xiamen University

I study the relationship between origin income, as proxied by land, and the individual's migration decision, using self-collected rural household data in China. I instrument the key variable - the household land - using the administrative record of the initial land allocated to rural households in the early 1980s via non-market channels. I find that migrants select negatively on landholding. The instrumented results show an even more pronounced negative relationship between landholding and migration propensity, suggesting that the unobserved attributes which positively affect migration are also positively correlated with the income-earning potential of the villagers.

I also roll back a household selectivity problem by an entire generation by studying the migration decisions of the descendants of a group of immobile rural residents.
My findings show that in the absence of the household selectivity problem, historical class background emerges as an important determinant of rural-to-urban migration.  People from households affiliated with the rich peasant or landlord class historically are more likely to migrate than people from households designated as poor peasant class in the past.



Enclosing Old Neighborhoods: New Institutions in Malaysia
Siti Hajar MISNAN, E.H.W. Chan, B.S. Tang
The Hong Kong Polytechnic University
S.B. Ahmad
Universiti Teknologi Malaysia

This study attempts to investigate how different institutional arrangements in assigning the rights within an old neighborhood can have an effect on its property value. Enclosing traditional open neighborhoods has become increasingly popular in Malaysia in the past two decades, because the communities feel that they can no longer trust the civil society or rely on the government to protect their economic and physical security. Though legally not permissible, some neighboring households who live next to each other choose to enclose (guard) their neighborhood by fences or by restricting access. To address the situation, the government amended the law and introduced new guidelines in 2007 that allowed the emergence of guarded communities. However, the law still does not allow a guarded community to build physical barriers along the community boundary, although a guard house can be provided.  Many traditional open (non-guarded) neighborhoods continue with the original form. Hence, the property rights and mode of security for guarded communities are rather different than for non-guarded traditional communities before and after the new law.

Different decisions by the communities on how they are enclosed since the 1990’s generate different allocations and assignments of property rights, which tend to affect the behaviour of the communities and their property values. Thus, by using a natural experiment of different institutional arrangement before and after the new law, this study uses non-guarded traditional communities as a control group to appreciate what would have happened to the treated group (guarded community). The study begins by mapping the spatial distribution of guarded and non-guarded communities, identifying the causes of institutional change, examining the mechanisms of different institutional arrangements, and finally exploring the impact of these arrangements, as reflected in the property value. It will make use of a number of important concepts and issues of institutional studies, such as hierarchies of rules, governance structure, property rights, collective action, institutional change, and problems of the commons.

The topic has not been examined in Malaysia through the new institutional economics perspective. This article seeks to fill the gap by bringing together a comprehensive study of community institutions in Malaysia and to strengthen the understanding of institutional change and property rights theory. The findings of this study may reflect an appropriateness of the new law and provide a prefered governance pattern either guarded or non-guarded as references for communities to develop voluntarily for the best of their interest.



Can Private Solutions Protect Property Rights in Genetically Modified Seeds?
Guilherme Fowler de Ávila MONTEIRO and Décio Zylbersztajn
University of São Paulo

This paper investigates the extent to which private solutions are effective in protecting property rights associated with genetically modified seeds. The paper examines a particular case: the collection of royalties in genetically modified soybean seeds in the U.S. and Brazil. The empirical analysis suggests that, subject to the quality of the institutional controls, the firm may choose to transact a particular attribute (resistance to glyphosate) aside from the asset (seed), building governance structures that frame around the attribute and not around the asset as a whole. These results have interesting implications for the analysis of complex assets, since they broaden the analytical framework that is usually applied to the study of governance structures.

Keywords: Property rights, strategy, institutional environment, seed



Informal Institutions of Quality Provision in Russian Public Procurement
Svetlana PIVOVAROVA
State University - Higher School of Economics


The Russian public procurement system lacks formal institutions for quality provision.  If a procurer relies only on formal rules during the procurement procedure, she often receives a good, work, or service of insufficient quality. In order to solve this problem, informal institutions of quality provision are being introduced by the procurers and suppliers. The purpose of this work is to study the informal institutions that arise in this situation.

The Russian public procurement law prohibits both prequalification of suppliers and quality assessment during the procurement procedure for most kinds of goods, works, or services, and it sets open bid descending price auction as a primary procurement procedure. Cases of insufficient quality delivery are supposed to be settled in court. Yet in this case the judicial system is inefficient. The prevailing solution that Russian procurement officials chose to provide sufficient quality of procured goods, services, or works is to organize an unofficial preliminary quality screening and to manipulate the official procedure to insure the “win” of a qualified supplier. In the eyes of the regulator and\or researcher such a procedure would look “corrupt” ex post.

This work presents an attempt to model the behavior of a non-corrupt procurer in this situation in order to understand the difference between corrupt and non-corrupt cases. As a first step, we provide a model that tries to explain how the incentives for introduction of informal institutions of quality assessment may arise in the case of Russian-like regulation of public procurement.



Transaction Cost Considerations of Incentive Schemes for Promoting
Building Energy Efficiency:  Real Estate Developers’ Perspective
Queena K. QIAN
The
Hong Kong Polytechnic University

In a Coasian world where all positive externalities will be internalized through costless negotiations, the market will give sufficient incentives to building owners to adopt building energy efficiency (BEE) products. However, empirical observations in Hong Kong and Singapore’s construction industries show that the market for BEE products is yet to set up adequately. This may be attributed to the prohibitive transaction costs in the market.  As a result, some forms of government interventions such as voluntary incentive schemes are called upon by the industry. Yet, it is conceived that the current incentive schemes have not fully addressed the issues arising from the market failure.

This study applies transaction cost economics to analyze real estate developers’ concerns towards adopting a generic BEE incentive scheme. As the dominant initiating force in the building market, developers have the choice to use any voluntary BEE incentive schemes. It is essential for both policy makers and developers to fully understand the transaction costs incurred.

As an extension of previous research, this study aims to identify transaction cost items incurred by the developers upon adopting BEE incentive schemes, and to develop a transaction cost framework for evaluating a generic BEE incentive scheme. The objectives are: (i) to understand the causes that hinder developers from entering the BEE market, (ii) to study the developers’ concerns in terms of transaction costs, (iii) to set up a framework to appreciate developers’ considerations of BEE investment in terms of the transaction costs, and (iv) to develop policy recommendations on specific transaction areas to improve incentive schemes from the new institutional economics perspective.

With both the developers and government better informed about concerns and transaction costs involved with BEE incentive schemes, the study helps to bridge the gap between the two parties to promote BEE. This study also provides policy implications for designing BEE incentives. The transaction cost framework could also be generalized to study concerns of other stakeholders in the BEE market for different countries with reference to their own specific constraints. Furthermore, this study extends transaction cost theorizing to the case of government-business relations in the spirit of Coase’s original contribution.



Art Auctions: The Difference in Sale Rates across Auction Departments
Aliya SAYAKHOVA
State University - Higher School of Economics

For many centuries auctions have been a common form of selling procedure, especially for art objects and antiques such as paintings, jewelry, and furniture.  This project presents a study of sale rates and prices in art auctions of the last decade.

Art objects that are put up for sale at auction often go unsold. The reason for this is the following: a seller sets a secret reserve price on each item, and if the bidding does not reach the reserve level, the item will go unsold.  Sale rates not only vary tremendously across time, they also vary systematically across different departments of the auctions. For example, the average sale rate for wine is 89%, while the figure for Impressionist paintings is only 71%.

This project addresses the question on why this difference remains stable.  The author presumes that the seller decides whether to sell or not to sell an item depending on the amount of information that his decision will reveal to the participants of the auction.  If the seller doesn’t want to sell a certain item, this implies he doesn’t want to reveal information on its price. This leads the author to a conclusion that the difference in sale rates can be explained by the theory of private and common values. In this paper she constructs a game-theoretical model which shows a relationship between the method of value construction of the item and its probability of being sold.  In the private values case, all items on the auction are independent, while in the common values case, the information about one item can affect the probability of sale of the other items. The empirical findings are expected to demonstrate that in the common values case, the sale rate is much lower than in the private values case. The preliminary findings are consistent with this hypothesis.   



Mapping the International Attention in Online News
Elad SEGEV
The Hebrew University

What countries get more online news attention? This study develops a new tool to map the most popular countries in online news and their relations with other countries. As the Internet is increasingly becoming a major way to acquire news, it has significant influence on the political and economic decision-making around the world. The growing connectivity and global diffusion of news raise questions regarding the evolving perceptions of the world. Together with more abilities to express local and national views, popular news websites may continue to support, for example, the dominant flow of news from the USA and Europe and thus reinforce American or Western interests.

This study developed online software that automatically retrieved daily news articles from 35 popular news sites in 10 different languages (including English, Chinese, Japanese, Arabic, and so on) in order to assess the perceived salience of countries and their international relations with other countries during a period of 6 months. In each news site, five main topical categories were observed, including “top news”, “world news”, “business” and “economy”, “technology”, and “entertainment” and “culture”.

Supporting previous observations on traditional media, the findings indicate that the USA is by far the most prominent country among popular news sites around the world in both the political and the economic spheres. China is a significant economic actor in American news sites, but less so in European or non-Asian news sites. Middle Eastern countries receive high attention in world news, and European countries in cultural news. The network structure of news links follows three different patterns: two-hub networks presented by most European and Asian news sites, decentralized networks presented by Middle Eastern news sites, and centralized networks presented by American and French news sites. The reasons behind these findings and their implications are discussed.



Does Natural Resource Abundance Hinder Investment in Education?
The Case of Russian Regions
Olga VASILYEVA
Amur State University

Does natural resource abundance affect the investment in education?  Studies of the resource curse phenomenon provide evidence that resource abundance adversely affects the accumulation of human capital. It seems obvious that resource abundance should lead to faster economic growth, as it gives additional sources for investments, both in human capital and in physical assets. However, the resource curse literature finds the opposite. In countries with low quality institutions, rent inflows due to the discovery of new natural resources or improved terms of trade for those which have already been exploited then stimulate rent-seeking and inequality and reduce incentives for investment, including that in education. Thus windfalls of resource revenues cause the further erosion of the institutions and quality of human capital, which leads to lower rates of economic growth, predicted by the theories of human capital and endogenous growth.

Most of the resource curse literature examining the linkage between resource abundance, quality of institutions, and human capital focuses on the national level; the resource curse at the sub-national or regional level is far less studied. Is it possible that the institutions in some regions were tangibly better than in others, and that the residents of one region had greater incentives to invest in human capital than in another?

Through studying Russian regions, this paper attempts to show that in countries with both symptoms of the resource curse at the national level and a high degree of spatial divergence in terms of economic growth as well as natural resource endowment, the resource curse is observed at the sub-national level. I assume that in regions that are relatively rich in natural resources, the quality of institutions is worse than in the regions relatively poor in natural resources. A particular case of the resource curse at the sub-national level is the low incentives of residents in regions rich in natural resources (or that assign the resource rents of other regions), to invest in human capital, especially in education.



Strategic Corporate Philanthropy
Olena VERBENKO
The University of Chicago


As Porter and Kramer state in their Harvard Business Review article “The Competitive Advantage of Corporate Philanthropy,” “most corporate giving programs have nothing to do with a company’s strategy. They are primarily aimed at generating goodwill and positive publicity and boosting employee morale.” There are, however, ways in which corporations can do giving so that both societal and corporate economic goals are satisfied and maximized.

Using an original database that includes firm-level data on dollar donations to and management involvement with a company’s giving program and corporate foundation, I examine factors that contribute to strategic corporate philanthropy. I examine whether top management team involvement into corporate philanthropic giving, as well as company’s long-term commitments to and strategic choice of grantees are predictive of corporate financial performance in a short- and long-run. By bringing together corporate philanthropy and business strategy, a company can create a greater social value.

Keywords: Corporate philanthropy, strategic giving, corporate governance, firm value



Optimal Arrangements in a Sub-Optimal World?
A Comparative Case Study in Philippine Urban Development
Deanna T. VILLACIN
University of the Philippines

“Modern Makati” was a planned city, but unlike other planned cities in the world it was brought about purely at the initiative of a private entity, the Ayala Corporation.  Its commercial and business district has long been considered the financial and economic heart of the Philippines.  This area has the highest land values in the country.  The public has open access to the commercial and business district, but until today that continues to be wholly owned by the private sector and maintained by the Makati Commercial Estates Association (MaCEA).     

This long-term arrangement in the Makati commercial and business district is made possible not by law but by use of private contracts, agreements between the original developer and lot owners wherein attached to the deed of sale is a deed of restrictions.  One important stipulation is that once a lot is purchased, the new owner automatically becomes part of the MaCEA and subject to its rules.  MaCEA’s main objectives are to maintain, operate, and impose higher standards of quality (relative to that of the state) of zoning, infrastructure, and other services such as garbage collection.  Similar arrangements are found in other commercial and business districts in the country.    

The research takes a comparative case study approach in analyzing the relatively optimal outcomes in the Makati commercial and business district and other commercial and business districts with similar arrangements, versus outcomes in commercial and business district which do not utilize such arrangements.  Employing both quantitative and qualitative (survey) data, it seeks to show the relevance of institutional factors in accounting for the relatively greater efficiencies in the Makati commercial and business district and other similar commercial and business districts.  Also, employing a game theoretic framework and taking into consideration the incentive structures faced by the various actors, the study investigates the strategic interactions within MaCEA and between MaCEA/Ayala Land, Inc. and the government.  In particular, why are the arrangements upheld, and what determines the credibility of the arrangements? 



Bureaucratic Corruption, Democracy, and Judicial Independence
Gang WANG
University of California - Berkeley

Corruption, as government officials use public powers for private economic interests, has been the hot topic of debate among social scientists. Evidence of bureaucratic corruption exists in all economies, at various stages of development, and under different political and economic regimes. But why is it more pervasive in some societies than in others?

The theoretical literature in economics and political science has made numerous efforts in understanding the determinants of corruption and has stressed the importance of political institutions in shaping the patterns of government corruption. Following the logic of the principal-agent model, many political scientists argue that a democratic regime predicts a low level of corruption. However, the logic of “democracy clean theory” is problematic, and the empirical evidence of a relationship between democracy and corruption is mixed.

Employing a formal model with empirical analyses, I incorporate economic factors with political constraints to investigate such different roles of institutional arrangements as democracy and judicial independence in determining the level of bureaucrats’ corruption across countries.  I argue that the judiciary, as a hard institutional constraint to resist bureaucratic corruption, has to be independent from the government.



Informal Authority, Formal Authority, and Public Goods Provision
in Rural China
Yiqing XU and Yang Yao
Peking University

Based on a unique dataset collected from 246 villages in 29 Chinese provinces during 1986-2005, we investigate the role of authority coupling in public goods provision, and the relationship between kinship networks and grassroots democracy. Our empirical strategy asks whether an elected village chairperson who comes from the largest surname group will increase the chance of village self-funded public investments during his/her term of office.

Both static fixed-effect models and a dynamic panel framework are appealed to, followed by a quasi-experiment approach to address potential endogeneity. We find that on average, 0.264 more projects will be carried out in a normal three-year term if the elected village chairperson in office comes from the village’s largest family than otherwise – a difference as much as 46.8% of the sample mean. This is because elected village chairpersons from the largest surnames can minimize collective action problems and alleviate redistribution pressure from the public. This effect is more salient in the villages that maintain genealogies or ancestral halls, and it only exists after elections were adopted.

Our results suggest that in Chinese villages, if traditional authorities (large families) identify with elected formal authorities, democracy can work better. The result also implies that transplanted institutions do not necessarily conflict with persistent indigenous institutions; on the contrary, they may reinforce each other if the former can properly release the potential power embedded in the latter.

Keywords: grassroots democracy, local authority, public goods provision
JEL: D72, H41, O12



Land Contractual Mix in Qing China: Facts, Hypotheses and Tests
He YANG
George Mason University


This paper discusses the factors that determine the selection of agricultural land lease contracts: share contracts vs. fixed rent contracts. Using Chinese data from the 19th century to the early 20th century, I find that the mix of contracts is determined by the balance between transaction costs and risk premiums. The Taiping Rebellion as a natural experiment illustrates that when the risk of production rises, the fraction of share contracts increases.  Cross-sectional data for mountain leases and flat land leases also support this hypothesis.



Endogenous Transaction Cost, Specialization, and Strategic Alliance
Yi ZHANG and Juyan Zhang
Singapore Management University and Southwestern University of Finance and Economics

In property rights theory, the firm is an organizational response to reduce transaction costs associated with hold-up of using market mechanism. We claim that strategic alliance -- without changing firm boundaries or asset ownership -- is another type of organizational response. We construct a model to investigate individual firms' strategic choice on specialization or diversification when producing intermediate products and their further choice of organizational form: autarchy or forming a strategic alliance. We introduce fixed learning costs as an indicator of economies of scale and show that only if fixed learning costs are large enough, will firms have an incentive to choose specialization and form strategic alliances. We distinguish between asymmetric strategic alliance and symmetric strategic alliance and show that transaction costs are not monotonic with respect to fixed learning costs. In particular, for an asymmetric strategic alliance, there exists overinvestment with un-utilized capacity. Further, an asymmetric strategic alliance is always unstable, while a symmetric strategic alliance is stable only if fixed learning costs are large enough. The firm who is entitled with higher learning cost gets higher payoff -- rewards for the endeavor. If firms are more patient, they are less likely to form strategic alliance.

Keywords: Endogenous transaction cost, hold-up, specialization, overinvestment, strategic alliance
JEL: D23, L14, L22

 
Abstracts
|2001 Berkeley |2001 Rio |2002 Cambridge |2003 Budapest |2003 São Paulo|
|2004 Tucson |2005 Barcelona |2006 Boulder |2007 Reykjavik |2008 Singapore|
|2008 Philippines |2008 Beijing |2009 Bratislava |2009 Xiamen |2010 Moscow|
|2010 Shanghai |2011 Chicago|2012 Beijing |2012 Santiago |2013 Xiamen|
|2014 Manila |2015 Hong Kong |2015 Tel Aviv |2016 Tallinn |2017 Xiamen|




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