Ronald Coase Institute

2010 Moscow Workshop: Abstracts

MAY 2-8, 2010


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Environmental Uncertainty, Technological Uncertainty and Incentives:
An Empirical Analysis for Spanish Industrial Firms
Marco A. BARRENECHEA-MÉNDEZ, Eduardo C. Rodes-Mayor, and Pedro Ortín-Ángel Universitat Autònoma de Barcelona

In this paper we attempt to provide empirical evidence for the relationships between environmental and technological uncertainty and incentives provision. One of the central predictions of the traditional agency literature (Holmström 1979, 1982, Holmström and Milgrom 1987, 1991) is the negative relationship between environmental uncertainty and incentives strength. The intuition behind this assertion is that risk-averse workers are reluctant to accept output-based compensation in environments characterized by high environmental uncertainty (i.e., events that arise from the external environment and over which neither firms nor workers have control). Prendergast (2002) and Devaro and Kurtulos (2009) review several empirical studies dealing with this predicted trade-off and find no supportive evidence. This empirical evidence has driven theorists to look for alternative explanations.

In the last years there have appeared several theoretical works (Baiman, Larker & Rajan 1995, Lafontaine & Bhattacharyya 1995, Zabojnik 1996, Core and Qian 2001, Prendergast 2000, 2002, Adams 2002, Baker and Jorgensen 2003, Shi 2005, Raith 2008) suggesting that there is another effect enveloped in the measures of uncertainty of the empirical literature that has not been noted. They assert that after a contract is signed, the worker gets private information regarding how to carry out the job. Given that this information is not known by the firm, and following Raith (2008), we call it technological uncertainty (i.e., events that change the marginal productivity of effort and therefore the value of the agent’s actions). Technological uncertainty is interpreted as valuable information that can be well spent by the principal throughout the provision of incentives. Therefore, they predict a positive correlation between technological uncertainty and incentives provision. Also, Prendergast (2002) argues that the positive effect of technological uncertainty on incentives provision is throughout the delegation of decision-making. Therefore, if we were able to control for some measure of autonomy this positive relationship would vanish.

Relying on a database of 358 Spanish manufacturer firms, and using specific measures for environmental and technological uncertainty, we found support for the predictions of the standard agency theory and for the instrumental role of autonomy in the relationship between technological uncertainty and incentives provision. 

The Politics of Finance in a Developing Country:
Allocating Credit to Industry in Colombia, 1940-64
Carlos A. BRANDO
London School of Economics

Accounts of Latin America’s economic development in the middle of the twentieth century have been, and still are, dominated by interpretations framed under state-led and/or import-substituting industrialisation. This conventional literature attaches an extensive and penetrating role to the state in several policy fields, of which credit is a most important one. The current version goes that Latin American states intervened heavily in money and capital markets in order to prioritise the channelling of both ample and cheap supplies of credit to manufacturers, and in this way advanced official projects of protected industrialisation.

This paper demonstrates, from an institutional perspective, that this was not always the case, as illustrated by the Colombian experience. Since this is so a puzzle emerges. The literature, on the one hand, sustains that the Colombian state promoted ISI, amongst other means, through preferential credit allocation. The empirical evidence in this paper, on the other, demonstrates that credit for industry was neither sufficient nor subsidised to the extent commonly argued.

Based on archival research on key centres of public decision-making institutions, such as the central bank, congress, banking regulators and the cabinets and executive offices, qualitative and quantitative evidence substantiate the argument that credit to industry during the ISI era did not flow seamlessly. At one level, industrialists had to compete for scarce resources with other economic groups that proved more influential and powerful in the quest for financing – agriculturalists, specially coffee-growers and livestock-farmers. At another level, the preferences of governments and the capacity of the state to force financial agents to lend to industrialists was found to be much more limited than previously assumed; this might be a major factor explaining the apparent lack of public-based financial support of industry in this period.

A Game Theoretic Analysis of China’s Ongoing Land Institutional Change
Peking University

The dual asymmetric land property rights arrangement between urban and rural areas in China might prove to be efficient at a specific economic development stage, yet its drawbacks gradually are revealed as the Chinese economy grows rapidly. Local-level land institutional innovations have been observed during recent years. This paper aims to analyze the implication of such a dual property rights system when the central government needs to hire local governments to carry policies out.

By establishing a principal agent model with multitask, we prove that when the central government lacks complete control of the local government’s redistribution behavior, the local government would make a tradeoff between redistribution to itself and to rural residents, and this makes the incentive contract between the central and local governments suboptimal. Under such an incentive contract, the GDP level would be higher, yet the degree of inequality would also be higher than that under first best scenario.

This result informs us that although decentralization could work as a propeller of GDP, this does not come without sacrificing social equality under certain institutional arrangement. Further, put in a signaling game framework, we find that when there exists asymmetric information on the consequences of institutional innovation on key variables, a more gradual reform attitude of the central government to institutional change would reduce the welfare loss resulted from shock therapy or sticking to status quo attitudes.  

The Change of Legal Rules and the Credit Boom in Transition Countries:
Evidence from Belarus, Poland and Ukraine
Yanka Kupala State University of Hrodna

The proposed research is motivated by the rapid growth of household credit at the end of the 1990s in Central and Eastern European countries and in the Commonwealth of Independent States. Previous research concentrates mainly on macroeconomic aspects of the phenomenon, citing such factors as low and stable inflation rate and rapid GDP growth to explain the significant increase of household lending (Cotarelli et al, 2003). The institutional changes explaining the change of behaviour of lenders and borrowers remain underexplored.

The main focus of this project is on the institutional environment of the evolution of credit markets in transition economies of CEE and CIS countries. Over the transition years, all countries introduced legal rules to regulate the private credit market. The set of laws includes the bankruptcy law, law of creditors’ protection, and private or public credit registers. I argue that the effectiveness of formal institutions could influence the ex-ante behaviour and decision-making of agents in financial markets.

The successful development of the credit market is possible only when there is established legislation on personal bankruptcy in place.  The more efficient insolvency regime increases the competition in credit markets and widens the access to credit; moreover, as La Porta et al. (1998) argue, it has a crucial effect on the behaviour of creditors and debtors. In transition countries the consumer bankruptcy legislation either is poorly developed or does not exist at all.

The aim of this project is to provide empirical evidence as to how bankruptcy law affects borrowing behaviour. I will study whether there is a transplant effect, whereas the presence of such legislation significantly influences the size of credit markets. Moreover, I will examine how vigorous is the legislation from country to country and the different ways it is enforced.

The empirical part of this research will be based on household incomes and expenditures surveys containing major information about households’ financial behaviour.

Labour Market Institutions and the Allocation of Capital
Johan E. EKLUND and Sameeksha Desai
Ratio Institute and Jönköping International Business School;
University of Missouri

Economic growth requires that capital is (re)allocated from declining sectors to sectors with better prospects. This (re)allocation of capital is facilitated by well functioning capital markets. Capital markets are in other words conducive to structural change, and therefore often work against status quo. For firms and industries to be able to adjust to shifts in demand and supply it is necessary that they do not face institutional barriers that hampers the adjustment process. This paper hypothesis that labour market frictions pose one such barrier that reduces the functional efficiency of capital markets. Furthermore, efficient capital allocation can often be assumed to be at odds with other economic interests such as that of the labour force in sectors from which capital is withdrawn. We therefore examine how labour unions affect capital allocation, and under what circumstances unions facilitate (re)allocation or not.

To measure the efficiency of capital allocation we use the elasticity of capital with respect to output, which can be derived from the so-called accelerator principle. We employ a panel of more than 12,000 firms across 44 countries to estimate the functional efficiency of capital markets. We find that the elasticity of capital is positively correlated with labour market frictions. This means that, as firms adjust to changes in supply and demand conditions, firms facing institutional impediments to adjusting their workforce will make greater adjustment of the capital stock. The findings imply that labour market frictions lead to significant dynamic inefficiencies and allocation losses. As robustness test we also examine how long-term structural unemployment, a proxy for labour market frictions affect capital allocation. Moreover, we use a CES-production function approach to model the effects of labour market frictions on production dynamics. One theoretical prediction we make it that countries with relatively large labour market friction will have a comparative advantage in capital intensive industries, i.e. industries with a high elasticity of substitution between the production factors.

JEL codes: D24, E02, E24, E44, J01, J50, O16

Quality of Institutions and the Curse of Resources:
A Nonparametric Approach
Rui FAN, Ying Fang and Sung Y. Park
Xiamen University

In the field of development economics, one important claim by some recent studies is that the resource-abundant economies are likely to grow at a slower pace than the resource-scarce economies, which is referred to by the term “resource curse” (Sachs and Warner, 1997). Studies on how natural resources affect economic development commonly suggest the transmission mechanisms for this negative impact of natural resources on growth. One of the widely cited mechanisms is the “Dutch disease” developed by Sachs and Warner (1995). Recently, institutional quality emerges as a prevalent factor on such negative effects. For example, Leite and Weidmann (1999) claim that abundant natural resources increase corruption, and Tornell and Lane (1999) discuss rent-seeking behavior as the cause of the resource curse. However, Stijns (2005) argues that resource abundance is not always negatively associated with the indicators of institutional quality such as the rule of law and bureaucratic performance.

In this paper, we analyze the importance of institutions on the transmission mechanism of natural resources on the growth of the economy. This can be formulated by letting the slope coefficient of the regression model be a function of institutional quality variable. Using the functional-coefficient model, we examine how growth rates of countries are affected by natural resources via the deleterious impact on the quality of institutions. The functional- coefficient model has two distinct advantages over the previous studies: (i) we can take care of country-specific heterogeneity; (ii) we can determine the effect of natural resources on economic growth and the importance of institutional quality simultaneously.

In our empirical analysis, we estimate various models with two indicate variables for institutional quality: “average protection against expropriation” and “legal formalism”. Our main findings are that resource abundance has a significant positive impact on economic growth for countries that have high institutional quality, while there exists the resource curse for countries whose institutional quality is low. We suggest that the quality of institutional arrangement may be decisive for how natural resources affect economic growth, in contrast to the rent-seeking story of Sachs and Warner (1995) who considered that institutions do not play a role.

Domestic Courts as International Actors:
Mutual Empowerment with International Law
The Hebrew University of Jerusalem

What turns domestic courts and judges into international actors? That is the basic question of this paper. It is answered through legal and institutional analysis, exploring the relationship between two global trends relating to both structures and mechanisms. The first is structural, manifested in the judicialization of domestic politics, namely the expansion of judicial power vis-à-vis the other branches of government in many states. The second relates to the mechanisms of international law, which recently enjoys increasing implementation within domestic courts. These two trends interact and mutually empower each other. In the course of this process arises a new class of international actors – domestic courts and judges.

The judicialization is realized in varied ways in different states, but the general picture is very similar. Domestic courts are no longer perceived solely as dispute-settlers and law-enforcers, but they also play non-traditional roles, such as guardians of the rule-of-law, norms-endowers, and public-policy shapers. Their behavior in the past two decades or so has utterly changed the rules of political game by challenging the traditional separation of power model a-la-Montesquieu.

While positioning themselves as "quasi executive/ legislatures" by adjudicating high-politics issues, national courts have allowed themselves to get more involved in their States' international relations, gradually doing so by implementing international law rules. This is done after decades of reluctance to apply international law, and it has two implications. First, the growing application of international law empowers it, as international law's Achilles’ heel is its weak enforcement mechanisms. But more important, strong international law helps courts to fortify their position vis-à-vis the other branches of government, especially when seen as separate institutions competing for authority. International law does so by seeing national judges as direct subjects and supplying them munitions against their own governments (e.g., human rights treaties and customary rules of international law), allowing them to enjoy much higher legitimacy in the international sphere.

In this manner, a cycle of mutual reinforcement is generated between international law and domestic courts. This cycle changes both domestic and international institutions (rules of game) as it shifts power to domestic courts and judges, making them strong domestic and international actors.

Who Pays Bribes for Infrastructure?
Evidence from East African Manufacturing Firms
Sheshangai Kaniki and Tendai GWATIDZO
University of the Witwatersrand

Existing empirical evidence suggests that corruption in infrastructure is prevalent in developing countries. Using data on manufacturing firms in three East African Community countries – Kenya, Uganda and Tanzania -, this study will investigate what type of firms pay bribes in order to access infrastructure. This will provide policy makers with specific targets that they can aim for in the design of policies meant to address corruption in infrastructure provision. For example, if exporting firms pay more bribes than non-exporting firms, then targeted policies aimed at the exporting sector can be designed. Instead of using perceptions on corruption which tend to be highly subjective, the study will focus on measures that capture actual firm behaviour.

At present much of the empirical work on the economic characteristics of corruption is macro in nature. A better understanding of how corruption interacts with micro behaviour will enrich our knowledge of its economic implications. As Dollar et al (2005) explain the institutional and regulatory environment in which firms operate is a significant determinant of how much reaping will follow from their investment decisions. Thus, this study will make an important contribution by providing micro evidence. The study will use firm level data to investigate the factors determining whether firms will participate in corruption to access infrastructure. This will give better insight into the investment climate in the East African Community countries. For example the study can show (a) whether firms in particular geographical regions are more prone to being targets of corrupt officials and (b) whether exporting firms are more likely to pay bribes than none exporting firms. In both cases the results can provide specific reform targets for policy makers.

Outsourcing in Public Sector: Factors, Governance Structure and Efficiency
St. Petersburg State University

Currently executive departments of government are attempting to outsource supporting business processes, for example, accounting, technical support, and IT development. Experience indicates that outsourcing is not always efficient. The most significant problems are breach of the contracts’ timing, low quality of services provided, amendments to adjust prices, etc. Among the reasons for inefficiency are incorrect governance structures.

The paper consists of two parts: a theoretical and an empirical analysis of the structures governing transactions between service suppliers and government executive departments that outsource supporting business processes, with particular attention to hybrid governance structure.

The issue of outsourcing efficiency is considered in the framework of new institutional economics and strategic management approaches, as a problem of building effective hybrid governance structure at the base of government executive bodies.
O. Williamson showed that hybrid governance structures are preferable under conditions of recurrent transactions, mixed and idiosyncratic asset specificity. Other transaction attributes are paid attention too. All of them influence the choice of governance structure and commitments.

There are other important factors to be considered, those caused by specific features of the public sector. More pointed agent problem: the efficiency of outsourcing is limited by the abilities and wishes of public officials to specify contract requirements for a service provider to satisfy customers’ or public needs. The pressure from the side of public sector structure, where along with executive authorities, public offices, state-owned unitary enterprises and companies act as service providers.

The empirical analysis was carried out using the example of St. Petersburg. IT development is one of the most popular services outsourced by public executive departments.  The correspondence of the governance structures used by them to transaction attributes was tested, and revealed that there exist different governance structures used to govern activities that are outsourced.

On this basis the hypothesis of the influence of governance structure on the efficiency of outsourcing in the executive department of the government will be formulated and empirically tested.

Data for analysis and for further testing the hypothesis are taken from the database of St. Petersburg’s government contracts concluded in 2009. The civil servants’ questioning will be conducted with the aim to obtain appraisal of the efficiency of contract performance. 

The Specificity of Competition in Resource-Abundant Economies
Alexander KURDIN
Moscow State University

Resource-abundant developing economies in general do not outperform other countries in terms of growth rates and living standards despite their natural wealth. This phenomenon – ‘resource curse’ – is often explained by weak institutional environment including poor specification and protection of property rights. However, the transmission mechanism from the institutional environment to the performance of markets is not always emphasized. It may be more sophisticated than the obvious erosion of market incentives.

To shed light on this problem it would be useful to investigate possible distortions of market structures in such economies using tools of the new institutional economics. The logic of the model is as follows.

If the governor of a resource-abundant country cannot be efficiently controlled by the inhabitants (often because of poor institutional endowment) and simultaneously has an opportunity to extract resource rent, he may be not interested in the strong protection of property rights, at least in the non-rent-generating sector.

Poor protection of property rights, first, makes interfirm relations more expensive in terms of transaction costs. As a result, simply reversing the example from Henisz and Williamson (1999), we obtain the preference for hybrid structures over market-based relations and for hierarchies over hybrids. Focusing on horizontal integration, hybrid structures may include relational contracts such as synchronized actions; and hierarchies, if mergers are legally prohibited, may be substituted for by centralized cartels.

Second, market players in such an environment are more sensitive to rent-seeking behaviour from the side of governmental (or substituting for them) agents, which leads to a rising risk of expropriation. To hedge against this risk, market players have to invest in specific assets. Such an investment – ‘entry fee’ – represents by itself non-strategic entry deterrence. Simultaneously, the need to protect quasi-rents resulting from this investment forces market players to maintain the current institutional environment in the political market. If they are able to do it, the ‘entry fee’ becomes a strategic barrier. In addition, specific investment made by all incumbents ex ante may serve as a guarantee against opportunism ex post in their relational contracts.

These factors may represent fundamental pillars of imperfect market competition. They put in question the efficiency of traditional antitrust policies.

Corruption and Political Stability
St. Petersburg State University

The main goal of this research is to explore the relationship between political stability and corruption in weakly institutionalized polities - "weak states". I define corruption as the complex phenomenon that includes both petty forms like bribes and kickbacks and high level practices like "state capture". Political instability is characterized by the probability of a government change and intensity of political violence.

My main hypothesis is that there is a U-shaped relationship between political stability and corruption. The lower is the level of political stability, the higher is the level of corruption. Yet the very high level of stability in "weak states" might lead to an increase in the level of corruption. I argue that this relationship is determined by the strategy of political elites to use corruption as a mechanism for loyalty providing by rewarding supporters and controlling potential challengers. My argument is grounded in the theory of inefficient institutions, supplemented with the idea of asymmetry of political information and simple game theoretical model of political process.

The idea of a non-linear relationship between political stability and corruption confirms with empirical findings from statistical analysis of the data from 122 developing countries and set of case studies.

A Legal Transplant in Antitrust Law:
The Case of Section 8(A) of the South African Competition Act
Kathryn LLOYD
University of the Witwatersrand

Two broad findings of institutional literature to date are, firstly, that a country’s economic health cannot be dissociated from its institutional matrix and, secondly, that one of the most important factors in this relationship is the nature and quality of the country’s legal system. It is also widely accepted that the character and content of a country’s laws (as institutions generally) are shaped by unique historical and social factors and as such, any borrowing of laws from developed to developing countries should be performed with caution. A mismatch between transplanted laws and the local environment could result in the failure of these legal institutions to minimise uncertainty, rendering them ineffective, with negative implications for economic growth.

In this context, the proposed work assesses the success of a transplanted legal definition from European case law to the South African environment – specifically, the definition of excessive pricing under the South African Competition Act. The quality of the transplant is assessed by analysing the first two court decisions in South Africa to deal with section 8(a) of the Act, the excessive pricing provision. A major contribution of the proposed work is that it considers the legal transplant of a component of a rule, as opposed to an entire legal order, around which the majority of the literature has centred to date.

Overall, the analysis suggests that the initial quality of the definition is an insurmountable obstacle and that in the face of uncertainty, the South African courts have failed to generate a suitable alternative interpretation of the excessive pricing provision. A potential consequence of this failure is an uncertainty of outcomes, and hence, a coordination failure in respect of the relevant players in the economy.

The Vietnam Land Question - A Reversal of Fortune in Colonial Times?
Montserrat LÓPEZ JEREZ and Christer Gunnarsson
Lund University

The debate on the impact of colonialism in countries’ current economic performance has regained momentum partly by the publication of the works of Acemoglu et al (AJR). They are tracing the roots of underdevelopment, which are identified in terms of institutional inefficiencies, back to early colonial times. Although this statistical attempt should be welcomed by interested scholars, questions may be raised about the explanatory power of this approach for understanding differential growth and poverty reduction paths of today’s developing countries.

In this paper, we scrutinize the theoretical and conceptual underpinnings of AJR’s reversal of fortune thesis, with special focus on the distinction between extractive institutions and institutions for property rights, by taking colonial Vietnam as a case in point. Vietnam becomes our “natural experiment” as we will use the highly densely populated Tonkin (North) versus the less densely populated Cochinchina (South) to test their theory of the role and impact of different types of colonial regimes depending on initial population density in the colonies. Our focus will be on the land question. At the time of independence, inequality in land distribution had reached startling proportions and had become not only a burning political issue but also a hindrance to economic transformation. In Cochinchina only one fourth of the farming families owned all the land they were cultivating, and secure property rights in land were held by a small minority. This outcome is in line with AJR’s notion of “bad institutions.”

Can this situation be solely attributed to French colonialism? We will be arguing that once proper periodization of the phenomenon is considered and local agency is included in the analytical framework, AJR’s theory of colonial conquest cannot adequately account for processes leading up to an institutional order that did not provide secure property rights to a broad cross-section of the population. We argue that their proposed casual links need to be reconsidered. In this paper, we present an alternative hypothesis on the understanding of colonial impact on Vietnam’s post-colonial relative underdevelopment, which includes the interaction of colonial and local institutions as well as to the importance of market mechanisms.

What Does Success Look Like? The Role of Governance Structure
in Performance of Technology Licensing Agreements
Université Paris Ouest Nanterre La Défense

Transaction cost economics argues that a discriminating alignment of transactions with governance leads to more efficient outcomes via reduction of transaction costs (Williamson, 1985). Empirical evidence shows strong support for this tenet that firms choose governance form consistently with transaction cost predictions (Shelanski and Klein, 1995). However, just recently empirical works started to emerge regarding the performance implications associated with specific governance decisions (Leiblein et al., 2002; Sampson, 2003). In this article we examine this missing link between governance choice and its influence on performance in the context of technology licensing agreements.

We combine theory and research on technology transfer transactions and on governance forms to investigate the impact of variation in design of technology licensing agreements on their early performance. We hypothesize that companies can substantially improve their deal’s benefits by: 1) selecting governance mechanisms (and corresponding legal arrangements) according to transaction cost arguments, i.e. aligning them with the features of the transaction and the contracting environment, and 2) balancing interests of both licensor and licensee via the payment formula implemented in the agreement.

The empirical setting we use in this study is the French innovative market. We constructed an absolutely recent and unique dataset of 120 technology licensing agreements, based on the survey among members of LES-France. Using this dataset, we first built a typology of technology licensing agreements, ranging from classical transactional agreements to relational ones (MacNeil, 1974) and then analyze its variation in terms of performance outcomes. Our focus is on a precise, multidimensional measure of transaction performance, as well as on modeling approach (two-stage self-selection models), which disentangles the potential confounding effects that impede the identification of the real antecedents of performance (March and Sutton, 1997).

Overall, our findings demonstrate that governance selected according to transaction cost economics logic improves the benefits from technology transfer transaction (especially as they relate to innovative performance). In addition we show that the balanced payment formula (i.e. inclusion of both variable and fixed fees) in technology licensing agreements alone cannot bring to greater performance of a licensing deal.

We consider that this study is adding new insights into the empirical literature on transaction cost economics.

Key words: performance, governance structure, licensing agreements
JEL: L14, L24, O34

Labour Demand Adjustment:
The Role of Employment Protection Legislation
State University – Higher School of Economics

Employers incur costs while fulfilling the requirements of employment protection legislation in the processes of hiring and firing. But if wages or working hours are to some extent flexible, or the enforcement of labour legislation is weak, then employers have alternative ways of adjusting their demand for labour to economic fluctuations without significant changes in the number of permanent full-time employees. Subject to these factors (i.e. flexibility of wages and working hours, as well as strictness of enforcement) the employers’ perception about labour regulations can deviate from the actual rigidity of the formal rules, and if this difference is considerable then employment protection legislation, regardless of its formal strictness, no longer plays a role of an obstacle to firms’ decisions on hiring and firing and, consequently, does not significantly influence the labour market performance.

The main idea of our current research is to reveal those factors that have an effect on employers’ perception of labour regulations strictness and to determine whether this perception influence the employers’ decisions concerning labour demand adjustment.

Previous studies have found that, in spite of the formal rigidity of employment protection legislation, which is uniform for all Russian regions, the enforcement and compliance with labour laws vary widely across regions and types of firms. It made us suggest that the employers’ perception of the employment protection legislation strictness should also be different subject to particular firms’ characteristics and economic conditions. We also expect that those firms that consider employment protection legislation as an obstacle will tend to adjust their labour demand through wages and working hours, as well as the number of temporary employees and training, while those that do not consider it as a major constraint will hire and fire permanent workers more easily.

To test these hypotheses, we apply generalized ordinal logistic regressions and multivariate probit models to the dataset of 1100 Russian firms that was obtained during the survey conducted within the project at the Higher School of Economics in November 2009, as well as the World Bank’s BEEPS data on 1000 Russian firms obtained 2008-2009.

Serbian Media Influence in the Croatian Border Region  
Vera MIRONOVA, Maria Petrova, Ruben Enikolopov, Katia Zhuravskaya
Institute of World Economy and International Relations (first author);
New Economic School (other authors)

How do media affect voting behavior? What difference can foreign media make in a country with state-controlled media, especially in a post-conflict region? Our paper addresses these questions by comparing the electoral outcomes in the 2007 parliamentary elections in Croatia and, specifically, the level of nationalism in the Croatian border region, in the geographical areas that had access to foreign (mostly Serbian and Bosnian) mass media, and those that had no such access. The effect is identified from exogenous variation in the availability of the signal, which appears to be mostly idiosyncratic, conditional on controls.

The findings are as follows:
1) The presence of foreign mass media decreased the aggregate vote for the government party that is no longer considered nationalistic by the Croatian population, and increased the combined vote for the right-wing political parties;
2) Availability of foreign mass media increased general "everyday" nationalism in Vukovar-Sirmium county; and 3) In the towns and villages with foreign mass media, the turnout among the Croatian population was smaller than in the regions with no foreign media.

Electric Energy Saving, Electrification and Quality of Institutions
in Russian Regions
Novosibirsk State University

Efficiency of energy consumption is higher in developed market economies than in less developed countries. Research in this area shows that in developed countries the demand for energy is more sensitive to changes in prices. Developed market institutions create the stimulus for consumers to save energy. This is true for electricity as well. At the same time, less developed countries often have lower levels of electrification as a result of underdevelopment and prevalence of out-of-date technologies. The electrification process is closely connected with modernization and demands for favorable institutional environment that would create the corresponding stimulus.

The development of the Russian economy includes two simultaneous processes in the sphere of electricity consumption — (1) the electricity saving process due to the increase in electricity prices and (2) the process of electrification due to modernization.

Our hypothesis is that the intensity of these processes is influenced by the quality of institutions, especially the quality of relations between firms and the state.  A firm that realizes projects related to electricity saving or electrification has the stimulus to obtain competitive advantages. However, under the conditions of excessive intervention of the authorities or inconsistent economic policy, it appears that a more preferable investment is investment in special relations with the authorities.  Investments in relations with the state, both in monetary and non-monetary forms, yield the direct effect in the form of competitive advantages available in short-term, compared to more long-term investments in power saving or modernization. Dependence on inconsistent decisions of the state increases the risks of investments in other projects, making them less attractive.

The data on electricity consumption of main sectors, electricity prices and output of the sectors in 2005-2008 in Russian regions, and also the data on institutional features of the regions (electoral statistics, Social Atlas of Russian Regions indexes, OPORA Rossii indexes, and ROSSTAT data about activity of the regional authorities) are used.

We assume that in the regions with greater state intervention and worse institutions, consumers tend to react more weakly to electricity price changes, and electrification due to the economic growth seems less intensive.

An Institutional Analysis of a Lease Contract
St. Petersburg State University

The aim of the study is to correlate patterns of drafting a lease agreement with theoretical models. The agent theory, the transaction costs theory, the relation contracts theory are most valuable for our investigation.

As material for research, the lease arrangement drawn up by “Makromir” engaged in the construction and operation of shopping/entertainment centers has served. Most of our attention is focused on how the real contract that “Makromir” concluded with their lessees is related to the theoretical propositions, whether this agreement answers to the concept of an effective contract. Thus under efficiency refers not only to efficiency as the ratio of costs and benefits, but also the adaptive efficiency.

Based on the contract, we ought to define how specific investments are distributed; what incentives are created for their fulfillment; what instruments are chosen to resist pre-contract and post-contract opportunism of lessee; what is the ratio between inevitable transaction costs ex ante and probable transaction costs ex post.

Also interesting is how the features of the parties and character of interaction influence the manner and matter of contract.

We can say the positions of each of the named theories have found reflection in this agreement.

The adverse selection problem is solved by the fact that “Makromir” independently selects lessees on the basis of reputation. Post-contract opportunism is limited by detailed description of mutual obligations, the order of payments, etc.
In regards to Williamson, the contract can be classified in two ways: on the one hand, interactions have regular long-term character, on the other, possibilities for the lessee to influence the conditions of the contract are insignificant. That means the agreement is not neoclassical, but it is not really relation.

Relation contract supposes mechanisms of adaptation to external changes, methods of defense of economic interests on all sides of the contract.
The agreement provides the redistribution of specific investments to the lessee, protects specific investments from lessor’s hold up, establishes the residual property rights.

So we can see it is features of the parties and the interaction that explains additions which are included in the agreement, despite extra ex ante transaction costs.

Education and Social Cohesion in Russia: Some Empirical Evidence
State University - Higher School of Economics

The effects of education extend beyond the economic sphere. In this study, we explore education externalities on various measures of social capital in Russia. To what extent can education enhance social cohesion? Is the relationship causal, and what are the possible mechanisms of that influence?

These questions are of especial interest in Russia’s case, because of the relatively high level of education and the relatively low level of social capital. To understand this puzzling relationship we: 1) consider different components of social capital (trust, integrity, organizational participation, volunteer work) and 2) distinguish different effects of education (absolute, relative, cumulative). These effects of education known as the ARC model help to recognize the way education generates social outcomes.

We use the Georating Survey conducted by the Public Opinion Fund in Moscow. It covers 34,000 respondents in 68 regions.  The results suggest that educational attainment has large and statistically significant effects on social capital. There is some evidence that this effect is causal. However, it will be wrong to imply that more years in education automatically mean higher level of social capital. The relation is more complex. For example, more competitive forms of activity, such as organizational membership, do not depend on the average level of education in the region. A possible explanation is that individuals consider such activities as a zero-sum game where some groups benefit while others lose. Interpersonal trust influenced by strong cumulative effect – average level of education means more than an individual’s one.

We also test the marginal impact of education by splitting the sample at the median level of respondent’s education. The impact of average level of education in a community is much stronger among less educated people. Opposite, individuals with higher levels of education tend to trust and participate in civic activities regardless to their educational environment. Our explanatory hypothesis is that education improves social cohesion by increasing cognitive abilities and learning social skills during study.

Barter Networks in Russia – Surviving a Crisis
Aalto University School of Economics

In the 1990s up to the 1998 crisis, practically the whole of the Russian economy operated through barter transactions. In 2008, after a decade of sustained economic growth and development, as a by-product of the global credit-squeeze barter transactions started to increase again.

In classical economic theory, barter is seen as an inefficient way of trading compared to monetary transactions, due to high transaction costs. However, even from a theoretical point of view, barter can be seen as an optimal alternative in the Russian context when there is a lack of liquidity. The attractiveness of barter is enhanced by Russia’s institutional environment, historical and cultural traditions in informal networking as well as contract-enforcing properties of barter trading.

Effective bartering requires well-functioning networks to reduce transaction costs. Once these networks are formed, the marginal costs of trading decline. Avner Greif (2005, 2006) has found that organically developed networks can enable trade effectively even without any legal contractual deterrent.  In addition to networks enabling trade in uncertain conditions, barter also has contract enforcing qualities. Tangible goods, unlike money, form a guarantee between trading partners, as they can be more easily traced back to their source (Marin and Schnitzer 2002).

Traditions on network behaviour and reciprocal exchange are manifested in particular forms in Russian history as well as in contemporary Russia. Two specific traditions that have permeated Russian society are of interest here. First is the particular system of informal contacts and personal networks based on mutual favours referred to as blat that had its heyday in the Soviet times. Second is the centuries old practice of joint responsibility or krugovaya poruka (Ledeneva 1998, 2006) that has similarities both with the 1990s barter networks as well as with current day relations in Russian business and politics.

In explaining barter in Russia, this study examines available survey data from the 1990s to the present, as well as literature on barter, contract enforcement institutions, and Russian society.

Industrial Concentration and Price-Cost Margin of the Indonesian
Food and Beverages Sector
Maman SETIAWAN, Grigorios Emvalomatis, Alfons Oude Lansink
Wageningen University

It is well known that industrial concentration in the Indonesian economy is relatively high, and the competition law of 1999 has been established to lower it. One of the sectors that have a relative high and stable concentration is the food and beverage industry.

This paper investigates the industrial concentration in 54 sub-sectors of the Indonesian food and beverage industry in the period from 1995 to 2006. The first objective is to derive the measure of the convergence of oligopolistic structure in the industry. The second objective is to relate industrial performance, captured by the price-cost margin, with the industrial concentration.

Industrial concentration is measured by the combined market share of the 4 largest firms (CR4) and the Herfindahl-Hirschman Index (HHI).  This study uses firm level survey data provided by the Indonesian Bureau of Central Statistics classified at the five-digit ISIC (KBLI) level. To investigate the relationship between the industrial concentration and the price-cost margin, this research uses panel data analysis and takes into consideration possible endogeneity.

Results show a significant increase in industrial concentration in 1995-1999, which coincided with the period of the economic crisis in Indonesia. After 1999, the industrial concentration exhibits a slightly decreasing long-term trend. Furthermore, the industrial concentration for all sub-sectors tends to converge to the same value in the long run. Also, the results show that higher industrial concentration yields a higher price-cost margin. Finally, the introduction of the competition law in 1999 has slightly lowered market concentration and price-cost margin.

Keywords: industrial concentration, price-cost margin, competition law, food and beverages sector

Human Capital as a Determinant of a Population’s Health and the Condition of Health Services: The Case of Russia
State University – Higher School of Economics, St. Petersburg branch

A well-known feature of contemporary Russia is the poor level of its health services, which is usually related to lack of skills and/or care on the part of the medical staff. The institutional approach suggests that an explanation of such a condition is in the institutions in this area of Russian social life which do not make a proper relationship between people’s activities and their rewards, i.e., whether a doctor performs well or badly he is to get rather equal payoff.

Why are these inefficient institutions created and sustained? Here the people’s neglect of their health is proposed as a hypothetical solution of the issue addressed. The neglect is revealed in widespread alcoholism and drug addiction, growth of tobacco industry (while it is being removed from developed economies), as well as toleration of counterfeit medications and just poor quality of foodstuff, drugs, and medical services. So, poor health services in Russia may be the result of their meeting the people’s requirements for them.

What does determine the value of a man?  The economic approach suggests that a man’s health, like everything belonging to him, is a resource which is estimated by its payoff to the owner. Thus, people estimate themselves depending on size and society’s need for their human capital. It means that the greater the share of human capital in the national wealth and the more its importance in generating GDP, the higher people’s estimation of themselves and, by this way, their own health.

A hypothesis is proposed here assuming a positive correlation of demand for and ensuing size of human capital and the average lifespan in a country. To put it differently, one should expect poor human capital in Russia, and, vice versa, significant human capital in countries with a long average lifespan. The hypothesis fits the generally known facts.  The Russian economy is dominated by industries not oriented to investment in human capital – energy, extractive industry, food industry, trade, etc.  For comparison, Japan is a country with so well-known statistics as significant share of human capital in its national wealth and the world’s leadership in average lifespan.

Economic and Political Preferences of Different Religions:
Catholic versus Orthodox Groups of Population in Ukraine
State University – Higher School of Economics

Objectives:  Formal and informal institutions are closely linked and greatly depend on each other to shape economic and social policy.  In the last twenty years, the Russian Orthodox Church has played an increasingly significant role in post-communist politics.  Today, the Russian Orthodox Church is regarded as one of the most important informal institutions that shape people’s values, attitudes, and behavior regarding public policy in Ukraine.  This paper aims to contribute to a recently active line of research that investigates the relationship between religion and political-economic attitudes by using Ukrainian data.  

Data and methodology:  We use data from the 1999 wave of the European Values Study to investigate the causal relationship between a particular religious denomination (Catholics versus Orthodox) and a wide variety of political-economic attitudes in the Ukrainian population.  We perform a multivariate analysis that permits us to assess which political-economic attitudes were still linked to a particular religious domination, even when controlling for many other individual characteristics such as age, gender, marital status, education level, income, employment status, city size, number of children, nationality, and location of a respondent. The dependent variables are the individual attitudes towards freedom (as opposed to order and equality), authority, democracy, and economic conceptions (perception of competition and state redistribution).

Result:  We show that the Orthodox are more likely to have anti-democratic (pro-autocratic), anti-competitive (pro-government redistribution) and pro-state control preferences, as compared to Catholics and atheists. These results are even more statistically significant when the Orthodox variable is interacted with the frequency of church attendance variable.

Conclusion and future direction of research: Overall, Orthodox people are more likely to have paternalistic political and economic preferences than Catholics and atheists do.  Because of the problem of omitted variables, our estimates are unlikely to uncover any causal effect of the Russian Orthodox Church domination on political-economic attitudes. To isolate the direction of causation from the Russian Orthodox Church domination to political-economic attitudes, we propose distance from local religious centers as potential instruments in the next draft of this paper. We also add additional interactions, to take into account heterogeneous exposure to religious experience in the same region.

Restructuring of Russian Electricity Industry: The Effect on Tacit Collusion
State University – Higher School of Economics

The Russian wholesale electricity market is currently undergoing reform which is supposed to end in the beginning of 2011. As of January 1, 2011, wholesale prices on electricity will not be regulated. The aim of the reform is to create competition, which may be threatened in several ways, including a single firm with market power and a number of firms engaged in a tacit collusion. International experience, for instance, the California electricity crisis, suggests that the structure of the deregulated market should be carefully examined as it may enhance potential problems. Hence, it is necessary to analyze the incentives for non-competitive behavior that may be induced by the structure of the Russian deregulated wholesale electricity market.

Given that the aim of Russian electricity reform is to create competition in the former natural monopoly, this study is focused on such forms of non-competitive behavior as tacit collusion rather than on a single firm with market power. The purpose of the study is to examine the main features of the deregulated wholesale market of electricity that can create incentives for tacit collusion among generating companies. In particular the research focuses on the influence of forward contracts on the incentives for tacit collusion on spot market. Although previous studies have shown that the introduction of forward market creates possibilities for facilitation of tacit collusion, the research indicates that introducing capacity constraints can result in elimination of the facilitating effect. Under given assumptions, the existence of the facilitating effect depends on a number of market structure parameters.

The empirical data was obtained through publicly available sources. The results of model analysis concerning the potential for sustenance of tacit collusion in the Russian wholesale market of electricity after deregulation will be presented and discussed.

Does Land-Use Conversion Foster Economic Growth?
An Empirical Investigation of China
Peking University

The widening rural-urban divide in China is associated with the rapid growth of the Chinese economy in the last decade. Accordingly, fostering China’s urbanization ratio is one of the top interests of the government. The conversion of land use from agricultural cropping to industrial production becomes a powerful channel to speed up China’s urbanization. To do that, the state has two possible ways to increase industrial urban land usage: by renting and by expropriation. Therefore, the on-going land-use conversion is no doubt an important institutional evolution in today’s China.

In the present paper, I first argue that there is an economic trade-off of urbanization by land-use conversion. On the one hand, it can create more job positions and hence increase welfare in rural areas. On the other hand, motivated by political self-promotion considerations, local governments have an incentive to exaggerate the land-use conversion, which in turn distorts their local economies and creates more deadweight loss. In addition, the downward side also comes from the realization of accompanying rent-seeking and corruption. Therefore, the accumulated effect of land-use conversion would de facto deteriorate economic welfare.

Motivated by such theoretical insights, I investigate the impact of exposure of current land-use conversion on China’s economic growth by using Chinese provincial panel data for 1998-2007. For this purpose, I first construct several indexes to precisely measure the extent of land-use conversion. Since there is an endogenous nexus between land-use conversion and economic growth rate, a careful handling of the reverse causality is a need for unbiased estimates. After controlling for the endogeneity issue by choosing an appropriate instrumental variable, the exposure of land-use conversion is found to significantly boost the local economy. Such a finding is also robust to the inclusion of the role of political economy, different period  coverage, and even alternative econometric methods.

JEL classification:  O12, O18, P16, R52
Keywords: Land-use conversion; Economic growth; Corruption; rent seeking

Where Is Residents’ Disposable Income?
Ying ZHANG, Zhong Xu
Peking University

The ratio of residents’ disposable income to GNP in China dropped about 11 percentage points - from 68.60% to 57.52% - during 1997 to 2007. To keep a healthy and sustainable development of China, the reasons for this sharp drop should be found out and measures should be taken to reverse this trend, since residents’ disposable income is the base of domestic demand, and it is time for China’s economy to turn from export to domestic demand. Statistics from the Table of Fund Flows in China Statistical Yearbook show that the ratio of governments’ income to GNP increased from 18.30% to 24.06%, and this rate of enterprises increased from 13.10% to 18.42% in this period, so most scholars studying this problem draw a conclusion that Chinese governments and enterprises should raise wages to increase residents’ disposable income.

However, the Table of Fund Flows does not take governments’ extra-budgetary income into consideration, while such income covers more than 15% of governments’ total income. And this is registered under the enterprises’ income because governments’ income and residents’ income are both obtained through summation of listed kinds of income, while enterprises’ income is the residue of GNP subtracted from the governments’ and residents’ income. We adjust governments’ and enterprises’ income using estimated governments’ extra-budgetary income, and find out that governments’ income increased from 19.16% to 30.04%, while enterprises’ income nearly remain the same. So it is governments that take away residents’ income.

This increase in governments’ relative income is mainly due to socialist public ownership of land and the construction of state-owned monopolistic enterprises. The price of land increased at an average rate of nearly 100% every year after the housing reform in 1997, and the profits of state-owned enterprises increased at an average rate of 38% in the past 10 years. Profits from transfer of land usufruct and state-owned monopolistic enterprises enlarge governments’ share of capital income by 16.21%. We suggest that government should redistribute wealth and assets among enterprises, residents, and governments to let residents enjoy the fruit of development.

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