Ronald Coase Institute

2012 Beijing Workshop: Abstracts

MAY 20-26, 2012
Beijing, China


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|Siodla|Wang|Xu|Zhang L.|Zhang Y.|Zhou|

Responding to Incentives: Does the Lack of Criminal Responsibility among Filipino Juveniles Increase Recidivism Rates?
Rosa Mia L. ARAO
University of the Philippines

This paper analyzes if the lack of criminal responsibility among Filipino adolescents increases recidivism rates. The economics of crime postulates that the decision to engage in crime is an optimizing response to incentives such as expected payoffs from the criminal activity and the costs, namely, the risk of apprehension and the severity of punishment. What happens to this decision if punishment, particularly the likelihood of incarceration, is removed? Using data on juvenile criminal activity before and after the passage of the Juvenile Justice and Welfare Act (JJWA) of 2006 which exempts children below 15 years of age of any criminal responsibility, while those aged 15 to 18 are likewise exempt if they acted without discernment, this paper investigates what drives the decision to engage in criminal acts and determines how the lack of criminal liability affect the probability of repeat offenses. Indeed, while the law intends to increase protection of children in conflict with the law, it can also unwittingly encourage children to commit crimes since the law guarantees no penalty. In fact, the recent rise in criminality of Filipino children has been linked to the use of minors by organized crime syndicates for crimes like robbery, theft, and illegal drugs.

Levitt (1998) finds that juveniles just like adults respond rationally to sanctions and incentives to engage in criminal activities such that harsher punishments are associated with lower crime rates. This paper extends Levitt's analysis and adds to the scant literature on the response of juvenile crimes to sanctions by showing that if indeed the response to crime is just how theory deems it, then the lack of criminal responsibility would lead to a rise in recidivism rates. Furthermore, this paper analyzes how the likelihood of repeat offenses varies from the age of no criminal liability to the age of majority.

Foreign Players in Local Markets: Getting Development Right by FDI Enterprises - An Institutional Analysis of Hong Kong Real Estate Developers in China's Urban Land Market
Steven Xingguang CHEN
Sun Hung Kai Properties Limited/Hong Kong Polytechnic University

The real estate industry has been the second largest sector in China to fetch foreign direct investment (FDI) since her opening up economy in 1978. In the past three decades, Hong Kong based developers have been regarded as the greatest individual contributors of China's FDI inflow and urban landscape transformation.

This study aims to understand the involvement of FDI players in the real estate sector in relation to the property rights arrangement in China's urban land market. An empirical study has been carried out studying 310 urban development projects conducted by 11 key HK-based developers in Mainland China, which cover more than 80% of all FDI real estate development projects in China since the economic reform.

The preliminary results indicate that FDI share holdings are on average 11% higher for projects surrounded by well-developed areas, to which the property rights are better ascertained by the physical environment. Whereas the FDI share holdings are 3% less for projects, which entail de facto development rights, obtained by the sitting SOEs or work units, which would require their local partners to deal with problems like residual claims etc. The data also indicate a distinct growing tendency for HK developers to acquire lands in newly launched CBDs, city fringe lands, and virgin lots in remote areas during the past five years, where property rights are a less thorny issue compared with carrying out development in the conventional urban areas. The perceived strengths and significant weaknesses of HK developers, such as local experiences, practices in terms of relationship under formal/informal rules, regulations, implementation and taxation/levies, will be discussed by case studies from various perspectives.

Games Political Dynasties Play: Province Creation in the Philippines
Prince Christian R. CRUZ
University of the Philippines

Institutions are created to minimize uncertainty by establishing a stable structure to everyday life. It is possible however, that uncertainty is minimized not for the entire society but only for the rule makers, i.e. the elite. To be able to explain institutional persistence, it is important to understand how elites create, manipulate, and perpetuate certain institutions.

In the case of the Philippines, the elites are best represented by political dynasties, which have long dominated the political and economic scene. The elite’s continued control of power can be traced through the creation and preservation of political units such as provinces, the highest-level local government unit. The number of provinces rose steadily from 52 in 1951, to 73 in 1986, and 80 in 2012. Currently, there are several proposals for the creation of new provinces with members of political families behind each move. 

The paper tries to explain how institutions change and persist by looking at the process of province creation. Using game theory, the paper looks on how members of political dynasties in the Philippines alter the number of provinces to stay in power. It focuses on two recent proposals for province creation: one success (Dinagat Islands) and one failure (Quezon Province). The paper assesses under which conditions dynasties use a cooperative game or a non-cooperative game to remain in power.

The paper highlights the difficulty of enacting institutional change. Dynasties pushing for creation of a new province need to play games at the national and local levels. Coalition building, at both levels, needs credible threats and commitments from other dynasties and members of the society. Proponents of a new province also have to subsume the huge costs involved, most especially the lobbying cost.   

Being a member of a dynasty has certain advantages such as lower lobbying cost and internalization of other costs associated with coordination problems. Pushing for institutional change may be slightly easier for dynasties but it is never guaranteed that their proposal will succeed. As with most cases of institutional change, there is no general formula for success and each case of province creation has its own idiosyncrasies. 

Institutions Promoting Fiscal Discipline:
Evidence from Swedish Municipalities
Jens DIETRICHSON and Lina Maria Ellegård
Lund University

How to maintain budget discipline and achieve fiscal sustainability is a persistent challenge at all levels of government, and the developments in many countries after the outbreak of the financial crisis show the immediate importance of this challenge. To study this question, we first use a simple game to provide intuition for how the interplay between the institutional structure and the players’ preferences over spending matter. In this framework, conflicts of interest over spending levels between an organization's planning and implementing branches create the need for both institutions that align incentives, and institutions that curb the bargaining power of the implementing branch.

Using this framework as a guide, we collect unique data on budget institutions and fiscal preferences for a large share of the 290 Swedish municipalities. The comparatively large number of cross-sections enables us to include measures of a diverse set of institutions in our estimations. Moreover, we explicitly measure the conflict of interest between the centrally placed committees, which are responsible for the overall fiscal performance outcome, and the local committees, which are responsible for their respective sub-fields only. The survey data indicates that substantial conflicts of interest between the two levels of hierarchy regarding the importance assigned to fiscal sustainability prevail in roughly half of the municipalities.

The estimations confirm the importance of the interaction between institutions and preferences, as the estimated correlations depend on the reported preferences. Centralization of the budget process, a credible threat of replacement of managers following systematic deficits, and surplus carry-over rules all appear beneficial to net revenues, but only in municipalities that report substantial conflicts of interest. Deficit carry-over rules are also positively correlated to net revenues, but contrary to our expectations, only in municipalities that report small conflicts of interest. Regarding the potential interaction between institutions, the data does not enable us to disentangle the influence of the two carry-over rules from that of centralization, as fiscally more successful municipalities to a very large extent employ both centralized budget processes and carry-over rules.

Keywords: Budget institutions, public organizations, municipalities, deficit/surplus
JEL codes: D02, D73, H61, H62, H72

Kinship Networks and Firm Performance
Evidence from Chinese Manufacturing Firms
Hanwei HUANG
Tsinghua University

Interpersonal connection is thought to be very important in China. This paper investigates how kinship networks affect firm performance using the 1995 Chinese Manufacturing Census, which has more than a half million firms in total. We first identify the firm-heads’ family names and the geographical clustering patterns of these family names. Then we relate firm performances to firm-heads’ family names and local clustering patterns.

We find that for firms located in an area with more concentrated family name distribution (higher Herfindahl Index or certain family names take up large proportion), firms with “largest family name” firm head have better performances (e.g., more revenue) controlling for firm level variables like ownership, age, etc. and region, industry fixed effects. Finally, we explore the channels that could explain the outcome to see whether these firms with “large family name” firm-head pay less wages, get more external finance, pay less tax, and export more.

The Structure of Financial Supervision: Consolidation or Fragmentation
for Financial Regulators? A Game Theoretical Perspective
European Doctorate in Law and Economics

The financial services sector has changed dramatically over the last 25 years. Financial institutions have transformed from domestic firms engaged in distinct banking, securities, and insurance services into integrated financial services conglomerates offering a broad range of financial products across the globe. This fundamental change has exposed the shortcomings of financial regulatory models, some of which have not been updated in decades. Given these developments, an assessment of the supervisory structures in place in each home country or jurisdiction is required. Further, the approach of financial regulators to financial crisis management, and the efficacy of current structures (national and international) in dealing with the collapse of a systemically important global financial institution, should also be subject to evaluation by researchers.

This paper aims to assess the existing structures of financial supervision using game theory concepts. The first part of the paper examines the relevant literature in the field. The second part presents the existing main supervisory structures in the world today. The third part develops a game theory matrix describing how two regulators working in the same field are expected to interact with one another. Possible market failures and possible solutions to correct these failures are identified. The fourth part assesses the existing financial supervisory models described in part one, in light of the solutions proposed in part 3.  The fifth part of this article will address an application in Public Choice theory.

Loss Aversion in the Voluntary Provision of Public Goods:
Why Cannot We Achieve the Best Level?
Experimental Evidence from China
Lin JING and Roland Cheo
Shandong University

In voluntary provision of public goods, previous studies mainly focus on (i) the deviation of experimental evidence and real life from the classical economic prediction that implies a zero rate contribution, and (ii) the ways and mechanisms to improve the cooperation level in public good experiments. In this paper, with an experimental approach, we try to give an answer to the question why we cannot achieve the best contribution level in the voluntary provision of public goods, and we suggest it is because of loss aversion. We consider that people contribute to public good for personal interests, and by making contributions in public good experiment, chances of gaining more that the RP (reference point) and that losing from the RP are both present. As loss aversion leads subjects to weigh losses far more than gains, it causes a decrease of the contribution level if loss aversion isn’t present.

Our experiment is designed with two types of framing presented in three treatments: gain treatment, covered loss treatment, and real loss treatment. Our data from 78 students in Shandong University shows that subjects in the loss treatments make significantly less contributions into the public good than players in the gain treatment, which greatly confirms our hypothesis.

We further talk about the relation of loss aversion to those factors that can enhance the cooperation level in voluntary provision of public good, such as pure and impure altruism, trust, punishment, and so forth. And we suggest that loss aversion is the cardinal and direct thing that affects people’s contribution to public goods, while other factors work through their influence on people’s loss aversion.

Does Proxy Access Increase Shareholder Wealth?
Evidence from a Natural Experiment
Torsten JOCHEM
University of Pittsburgh

The financial crisis of 2008 and the subsequent 2010 Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) led to a revision of shareholder proxy access rules by the SEC in August 2010. Seemingly technical in nature, proxy access – the right for shareholders to nominate a candidate to a public firm's board of directors − lies at the heart of shareholder control and has far-reaching consequences in the balance of power between shareholders and managements.

We use the repeal of the new proxy access rules by the U.S. Court of Appeals as a natural experiment to address the long-lasting debate whether proxy access creates or destroys shareholder value.

Our analysis finds that the repeal of the proxy access reform resulted in a decline of valuations for firms with plausibly entrenched managements, smaller firms in which investors could have made greater use of enhanced proxy access, and firms in which more investors qualified to make immediate use of greater proxy access. Further, the results indicate that the intended proxy access reform had rather weak effects: there are no valuation changes for large firms, firms that have just one of the anti-takeover provisions that are said to increase board and managerial entrenchment, and firms in which no single investor could have made immediate use of greater proxy access. Finally, we find no evidence that the market expected special interest investors (union and pension funds) to be sufficiently empowered to be able to push through politically motivated, value-destroying policies. We conclude that whenever proxy access was strong enough to affect firm valuations, the market valued proxy access reform positively, leading to an increase in shareholder wealth.

Why Do Brazilian Voters Punish Corrupt Politicians?
Ivan Chaves JUCÁ
Universidade Federal de Pernambuco
Data from Lucio Rennó Proprieties Limited, Universidade de Brasília

The current wisdom on voting behavior is that problems of information asymmetry and high political transaction costs undermine voters' ability to punish corrupt politicians. We will provide an empirical assessment for this claim analyzing vote behavior in the two last legislative elections.

As a preliminary result and contrary to expectations, we found that in 2010 voters indeed punished corrupt congressmen, refusing to renew their office. This could be explained by recent activism against corruption - a massive mobilization known as the "clean slate movement" - that helped overcome information failures. This research investigates if in fact this new informational environment resulted in electoral punishment for corrupt politicians. To do so we will use information on voting behavior for the last two elections. Drawing on a unique data set covering the entire country we will model the effect of having a criminal record on the probability of lower house national representatives maintaining office. This data set is unique because it is free from problems that typically affect corruption data such as endogeneity in the data generation process. Because of serious potential selection bias we will utilize research strategies that minimize such problems and will control for potential variables that explain successful reelection. Also because of the potential bias introduced by asymmetries in the judicial system at the district level we will also control for judicial activism.

Surplus Labor Test in China Using Micro Data under Sen’s Formulation and Extension Version: Some Implications for Dual Economy System
Jing LI
Peking University

The first focus of this research is to test surplus labor using micro data based on Sen’s formulation (Sen, 1966). There have been no studies using micro data testing surplus labor, to our knowledge. The second object is to develop Sen’s model further and do empirical tests to get some essential policy implications for dual economy system.

This research is considered to be significant for the following three reasons.
First, surplus labor and the dual economic structure are eminent characteristics of China’s economy. During the past decades China has made great use of surplus labor in agriculture to promote industrial development. Surplus labor is considered to be one of the most important factors in China’s economic growth. But since 2004 the wages of unskilled workers increase rapidly, which leads to a debate whether there is still surplus labor in current China. This issue is important for industrial policy adjustment and urbanization policies. We believe this is also an important issue for other developing countries.

Second, there are still debates on labor surplus economies theory between classical and neoclassical factions, which are mainly concentrated in Lewis’ assumption - the existence of the exogenous wage (institutional wage). Lewis did not explain how the exogenous wage was formed. Sen’s model is an attractive way to test surplus labor, for it sheds light on this logical difficulty. But we still find logically incompatible points in Sen’s theory, so we try to combine Sen’s frame with China’s reality to establish a model, leading to a better way to test surplus labor.

Third, Sen’s model can be developed to explain economic phenomena better. Specifically, the model assumes that peasants are always ready to do part-time jobs, in this research the full-time situation will be modeled, and data will also be employed to test the result. The result might be a good enlightenment for China’s urbanization planning strategy.

We plan to use village and household survey data collected from 77 villages of ten Chinese provinces for the period 1986-2008 by the Research Center of Rural Economy (RCRE) of the Ministry of Agriculture, People’s Republic of China.

A Study to the Sequential Withdrawing Process of Government
from Economic Sectors in China
Pucheng LIU
Peking University

We study the process and degree of the government’s withdrawing from economic sectors in the background of China’s historic institutional change in this paper. The theory of gradualism thinks that reforms in different sectors should take place in a sequential order instead of as a big bang. But the current theories cannot tell us the reason for the phenomenon that when the government withdrew from an industry (for example, the civil aviation industry), it still stays in another similar industry (for example, the railway industry).

We set up a model of a dynamic game between the central government and industrial sectors (especially including the financial industry, here commercial banks) to interpret this phenomenon. More specifically, we point out that all industries have incentives to keep themselves unreformed for rent-seeking. However, under the assumption that the central government is disinterested, the reform of one sector which is implemented by social consensus, measured by GDP of those industries in this game instead of their fractional share of the vote, can be only promoted by increments of other sectors. As there exists interest rate regulation, commercial banks are willing to transfer resources from the reformed sectors to the unreformed ones to avoid risk, so the current spontaneous reform may stagnate or even retrogress in the future if those unreformed sectors can still get large amounts of resources from commercial banks. Moreover, a comparative case study of the reform process of the railway industry and the civil aviation industry in China is given in point to show the up-to-date progress of the sequential withdrawing process of the government from economic sectors. In the following discussion part, our model gives an alternative explanation to the “middle-income-trap” phenomena in transitional countries.  We also discuss the role of financial deepening, or more concretely here, financial liberalization in the process of transition, and the influence of Lewis turning point to the marketizational reform in China.

Can Information Disclosure Really Ease the Lemon Problem?
Measuring Lemons in Housing Market Under Change in Inflation Institution
Soei Yuen Tung MA
Sun Hung Kai Properties Limited/Hong Kong Polytechnic University

Under information asymmetry, lemons tend to be overpriced. Measurement of the overpricing premium, however, is difficult in many commodity markets given the identification problems for quality attributes. Hong Kong's housing market has provided ample of market transaction records, which could enable scholars conducting empirical tests.

The subject identified for this study concerns "area inflation". In the past decades, so long as the law permitted, developers in Hong Kong's primary housing market tended to inflate the actual usable floor area for sales, which could go up to more than 50%. Buyers in the primary market could not inspect the premises because most of them are incomplete units. Housing prices of those units with higher inflated areas are more prone to decline in the secondary market where the buyers are legitimate to inspect the properties. Two years ago, new regulations impose a limit of 10% floor area inflation for all new development. The change of rules has enabled a natural experiment for empirical testing. By using a panel data of housing projects carried by selected developers in Hong Kong, this study will measure how much the overpricing premium will drop due to the introduction of regulatory controls.

Social Congestion: Evidence from the USA
National Research University Higher School of Economics, Moscow

Social capital, broadly understood as the capacity for collective action based on trust, norms, and networks, is shown to be instrumental for the quality of public sector governance, and for the efficient use of open access resources ('commons'). I test this conjecture for two key traffic outcomes – road safety and congestion, using data from 50 US metropolitan areas. In doing so I distinguish between 'social capital of drivers' (mutual respect and courtesy, road assistance and compliance with traffic rules) and 'social capital of citizens', reflecting political participation and awareness and other components of civic culture.

The results of our estimation are encouraging. Some variables of social capital are highly significant even after controlling for population and its density, income and other possible correlates that could affect traffic outcomes. Voting rates in metropolitan areas, volunteering, association membership etc. are among such significant social capital indexes, which are shown to be relevant for tragic outcomes. Of those, electoral turnout is the strongest factor reducing road congestions, which is an evidence of the voters' ability to hold municipal governments accountable and hence ensure proper urban management and planning. This is in sharp contrast with Zubareva (2011) who found no such significance for Russian cities. However, when it comes to the determinants of the number of accidents, voting rates and other indicators of civic culture lose significance, and it is now the social capital of drivers (mutual help and respect, volunteering etc. that matters for this traffic outcome. It appears that of the two traffic outcomes - accidents and congestions - the latter is more sensitive to government policies and hence the role of social capital is to ensure good municipal governance, whereas the former requires more conventional types of social capital operating at the grassroots. Instrumental variable estimations show that our findings do not suffer from an endogeneity problem.

The Role of Formal Contracts in Long-term 'Hybrid' Relationships
Evidence from Service Contracting by Municipalities
Károly MIKE
Corvinus University of Budapest

What is the role of legally enforceable formal contracts in business relationships with long-term commitments? Williamson argued that a 'relational contract' would emerge if there are large specific investments and uncertainty. A formal contract may serve as the basis for but is largely superseded by the non-contractual governance mechanisms of the relationship. He is less clear about the role of formal contract as we move away from this ideal type through 'hybrids' towards classical contracts with clearly specified rights and obligations. Following Macneil, he introduced the intermediate ideal type of 'neoclassical contracting';. This suggests that relational (non-legal) governance is gradually replaced by formal contracting. However, Williamson also stresses the potentially disruptive role of formal contracts for long-term relationships. Thus, the gradual move towards formalism along the 'continuum of hybrids' may be problematic. Formal and relational mechanisms may not coexist happily in any combination. To complicate things further, more recent scholarship suggests that formal and informal enforcement may be complements rather than substitutes. For example, hard legal sanctions may help long-term commitment (Poppo – Zenger). This implies that written contracts may become more (not less) important as cooperation becomes more relational.

My goal is to explore the role of formal contracts in business relationships with intermediate transaction-specific investment, some uncertainty and medium length that do not correspond nicely to classical or relational ideal types. I examine a dozen public procurement contracts for school catering services by Hungarian local municipalities. I focus on the detailed content of written contracts (the next research phase may be a field analysis of the working relationships) and explore (i) if 'Classical terms' specifying rights and obligations and ';Relational terms' establishing principles, guidelines and procedures for cooperation coexist in contracts; (ii) if the two types of terms are substitutes in the sense that some contracts rely more on one and less on the other; and (iii) the logical connections between Classical and Relational terms (C supports R; C is independent of R; parties must choose between C and R).

Will Incomplete Property Rights Distort Land Development?
Evidence from Urban Villages in China
Zhigang NIE
University of Hong Kong

The project is to test whether urban villages in China, identified by their incomplete property rights, may have the problem of rental value losses. With non-village residential estates as comparables, ninety-six pairs of cases were collected from three major cities in China: Shenzhen, Guangzhou, and Xi’an, representing nearly all feasible data collectable. Each pair contains an urban village and a non-village estate located side by side sharing similar height and building structure. The comparison shows that for more than 67% of the cases in Shenzhen, 77% in Guangzhou, and 79% in Xi’an, more severe rent dissipation can be found in terms of a production change (higher density, lower rents, and lower calculated per unit land rent) in urban villages.

Besides, it is also observed that urban villages have shorter life expectancies in comparison to non-villages. On average, the 16, 14, and 10 non-village estates demolished in the three cities in the past 5-10 years are respectively 19.8, 22.5, and 28.9 years old by the time of demolition. However, calculated from the collected 1054, 138, and 134 samples in the three cities, buildings in urban villages are respectively only 12.1, 12.2, and 13.8 years old on average, but many of them are already demolished or planned for demolition. The social costs then remain higher, since village buildings are much newer by the time of demolition. Overall, the study shows, so far, that with defective initial setting of rights in urban villages, higher social cost may always be expectable and persisting in terms of either a production change or an earlier contract change (demolition). In return, the results may further illustrate the importance of property rights.

Planting Houses in Shenzhen:  Market Prospers without Legal Titles
Shitong QIAO
Yale University and Peking University

Legal title is generally viewed as a precondition of developing a market economy. The rural housing market in Shenzhen challenges this idea. Almost half of Shenzhen’s buildings have been built by villagers individually or collectively in defiance of the prohibition of developing rural land. These illegal buildings, without legal titles and concentrated in 320 intra-city villages, host most of the 8 million migrant workers of Shenzhen and are the main livelihood of the more than 300,000 indigenous villagers. Transactions of these illegal houses have formed a prosperous market, which is not very different from the formal one except that it is informal.

In this paper I study the mechanism of this informal market by exploring how transaction parties reduce the risk of government demolition and the risk of contract breach when they have no legal titles to their houses. This empirical research provides an example that a real estate market can prosper without legal titles and reveals that property rights are actually a product of market forces rather than governmental fiat. Instead of focusing on top-down legal reform, the government should refrain from suppressing the bottom-up evolution of property rights.

Repressive Capacity vs. the Rule of Law: Theory and Evidence from Russia
Institute for Advanced Studies - IMT Lucca

During the last 10 years, the Russian state has significantly strengthened its ability to control and suppress political opposition, through investment into the security services, the limitation of political competition, and the curtailing of judicial independence. These investments into repressive capacity came at a price. While the ruling elites reinforced their hold on power, Russia experienced a significant increase of bureaucratic predation. This weakened the property rights of entrepreneurs and investors, thus hampering the country’s long-term growth prospects.

In my study, I argue that the increase in repressive capacity and the concurrent decline in the rule of law might be linked. I explore a newly assembled database of 312 corporate raiding cases that took place in Russia between 1999 and 2011. The database consists of an extensive collection of over 1000 newspaper articles collected through the online database Integrum. I analyze a panel regression model to investigate the effects of regional institutional environment and economic factors on the prevalence of corporate raiding across Russia’s regions, while also looking on the effects of corporate raiding on firm entry and regional economic growth. Finally, I also check for each case if the involvement of government agencies (as facilitators or initiators of raiding attacks) is mentioned.

I find that election results in presidential and Duma elections for Vladimir Putin or the ruling party (United Russia) have a strong and significant positive effect on the occurrence of corporate raiding in Russian regions. Higher political turnover on a regional level (regional governors) also positively affects the number of raids. I also find that in 181 of the 312 cases in my database (i.e. in 58% of cases), some kind of government agency was actively supporting or by itself initiating the attack. The involvement of government agencies in corporate raids (as a percentage of total raids) increases notably after 2003, from an average of 40% for 1999-2002 to an average of 62% of cases from 2003 onwards. This might show that after the crackdown on the oil-company Yukos in 2003, mid- and low-level government agencies in Russia felt less constrained than before to act in a predatory way.

Opinions Matter: Evidence from the Czechoslovak Transition
Dalibor ROHAC
King's College and Legatum Institute

This paper provides an explanation for the divergent transitional experience of post-communist Czechoslovakia. Narrow public choice-based explanations are unlikely to provide a satisfactory account of the different transitional paths in the two countries. We make the case that besides political economy constraints, policymakers in the two countries faced epistemic constraints, driven by the differences in opinions, beliefs and values in the two countries. To substantiate our argument, we use survey data from post-communist Czechoslovakia to identify systematic differences in views on a range of issues related to economic policy and social justice.

Keywords: Czechoslovakia; survey data; economic transitions
JEL: P26, D02, B52

The RHH Framework and the Great Divergence Between New Zealand
and Uruguay After 1930
University of Vienna

The Recorded Human History (RHH) framework from North, Wallis, and Weingast (NWW, 2009) provides a recent but as yet hardly empirically evaluated addition to the collection of complex institutional theories. Therefore, this work evaluates core characteristics of NWW’s role models of ‘Open Access Orders’ and ‘Natural States’ in the light of the socio-economic developments in New Zealand and Uruguay after 1930 to about 1973.

The two modern settler economies are selected, as they share similar size and factor endowments, but are based on contrasting institutional setups. In addition, both countries were socially advanced and economically well off on the eve of the Great Depression. Just four decades later, the ‘Better Britons’ still enjoyed democracy and prosperity, while the ‘Swiss of the South’ had to cope with major civil unrest and economic hardship. These diverging trajectories seem puzzling, as both states multiplied their interferences with national socio-economic spheres and implemented similar import substitution industrialization strategies. Hence, further in-depth comparative research based on the RHH framework allows obtaining novel insights into an otherwise less investigated case.

The inquiries for this work are separated into two layers. The first layer demonstrates that the degrees of stability in economic growth patterns and fundamental institutional underpinnings, as well as organized violence, were strongly interrelated. The second layer substantiates these results through further investigations into organizational structures, policy making, and particular economic markets. As such, both public administrations fell apart in their governability and their accessibility for major interest groups (including armed forces). Next, fiscal and monetary policies reflected these realities, especially in the size of total spending, investment levels, and direct taxation, exchange rate regimes and beneficiaries of scarce resources. Consequently, these factors heavily influenced the competitiveness of their major foreign trade sectors, although contrasting exogenous trade incentives also played a vital role. On the other hand, neither of the two ISI strategies possessed NWW’s alleged drive towards mature industrialization.

Summarized, a great deal of Natural State characteristics could be witnessed in the case of Uruguay. However, New Zealand’s case severely challenges the Open Access Order role model from the RHH framework.

Keywords: institutions, settler economies, welfare state, import substitution industrialization
JEL: B52, E65, N10, P52

Urban Land Development with Incomplete Property Rights:
Theory and Evidence from China
Jianfu SHEN
University of Hong Kong

This paper tends to integrate real option theory with property right economics, by constructing a theoretical model for irreversible investment without secured property rights. It aims to provide theoretical explanations for the argument that property rights affect investment and thus economic growth, which have been recognized in institutional economics and empirically tested in many developing countries. Yet the micro mechanisms underlying the argument are not well explored, although the literature proposes several channels such as insecure property rights lower investment incentives, reduce the collateral value and access to capital market, and increase the asset’s trading cost.

This paper provides a theoretical model of investment to show how property rights impact investment decisions. The incompleteness of property rights brings one more dimension of uncertainty into the investment on real asset, in addition to the volatility of the value of underlying asset. The theoretical model, based on the option pricing studies of McDonald and Siegel (1986) and Merton (1976), shows that insecure property rights lead to lower capital intensity and distortion development timing of the asset. The results are consistent with previous studies that the threat of future loss of asset control causes less investment, and future point out that the asset holder may not optimally deal with the uncertainty in investment decision due to the insecure property rights.

Urban land development in China is discussed in this new theoretical framework. The explosive urbanization induces a huge housing market in the city; while some houses have secure property rights granted by the Government and others are built on the land without legal property rights and in the confrontation of future expropriation.  The empirical studies show that the quality of restricted property rights houses is lower than the quality of normal ones. The popular hedonic pricing regression is conducted to test that the property rights are valuable by examining the housing value with and without secure property rights. This study has policy implications for the urban land development in developing countries.

Razing San Francisco: The 1906 Disaster and the Legacy of Urban Land Use
University of California, Irvine

Whether primarily urban or rural, natural disasters often leave immense destruction in their wake. However, they also leave opportunities for change. Landowners and developers must decide if, when, and how to reconstruct damaged areas. What can we learn about urban dynamics from studying a rebuilt city affected by a large-scale disaster? Using the destruction from the 1906 San Francisco fire as a laboratory, this study seeks to understand the role of durable capital and transaction costs in determining urban development patterns. All else equal, significant differences between pre- and post-disaster land use imply that the durability and specificity of real estate, as well as the transaction costs associated with adapting cities to contemporary needs, are important barriers to urban redevelopment. The disaster mitigates such barriers through the razing of over 28,000 buildings on over 500 city blocks. Thus, the comparison of land use measures in pre- and post-disaster San Francisco sheds light on the significance of the constraints involved in achieving more optimal urban outcomes.

Employing a unique dataset and GIS technology, this study focuses on city blocks located near the boundary of the fire. The primary outcome measure is residential density (residential units per residential acre), which is the dimension of land use depicted in the monocentric urban model. The study compares residential density inside and outside the fire’s boundary both before and after the disaster using a differences-in-differences approach. Exploiting the discontinuity in fire treatment at the boundary, where blocks on either side are presumed to exhibit similar development trends, evidence of substantial changes in San Francisco's land use is found upon reconstruction of the city. Specifically, the study finds that residential density increases significantly after the disaster in areas razed by fire relative to unburned areas. Essentially, through a shift into construction of apartment buildings, the city rebuilds nearly the same quantity of residential units on much less land, reflecting more intensive use of residential land in the razed area. This finding implies that thriving cities may be constrained by past capital investment, suggesting a vital role for path dependence and institutions in understanding urban development.

What Explains China's Housing Boom?
Xin WANG and Yi Wen
Tsinghua University

China’s housing prices have been growing rapidly since the reform, especially over the past decade. The high average housing price-to-income ratio has become a serious socioeconomic problem and has attracted much attention from news media and policymakers, because rising housing prices may not only widen the inequality gap between the poor and the rich but also jeopardize economic growth if the housing bubble bursts. An interesting question is what drove up China’s housing prices.

In this research, based on cross-province panel data, we determine the factors which could influence housing prices in China, including household income, local per capita GDP, bank credit, interest rate, mortgage down payment, sex ratio, and marriage costs, among others. Particularly, we are very interested in the role (local) government played in driving up housing prices. Our findings will provide useful for the central government to design correct and effective policies to improve the health of the housing market.

Cronyism and Hierarchical Efficiency
Zhihao XU
Peking University

Large organizations are adversely affected by their bureaucracy systems. For one thing, organizations with multiple strata are susceptible to serious principal-agent problems. For another thing, servility and cronyism easily emerge within an organization, inhibiting innovation due to the allocation of funds and positions by orders rather than market.  Few works in the literature of governance, however, rigorously formalize the mechanism of cronyism within organizations, theoretically; and seldom is empirical research carried out to find out whether senior governments and enterprises in the absence of cronyism are necessarily more efficient than those in the presence of such phenomenon.

  My ongoing research would theoretically show the relevance between the cronyism phenomenon and the principal-agent problem. It would show that cronyism presents an approach to cope with hierarchical inefficiency. Intuitively, even if all agents are at the same level of hierarchy, principals (such as senior officials or managers) are inclined to appoint and assign important missions to agents (such as relatives, secretaries, or direct subordinates) that they are familiar with or “near” in a professional or private relationship, rather than to those are “far away”, for it is easier (indeed not necessary) to observe the effort of the “near”, thus reducing monitoring costs. Specifically, the farther the relationship is, the more difficult the monitoring is, and the less likely that agents are promoted or rewarded. However, despite the reduction of monitoring costs, cronyism results in an unfair atmosphere, leading to less effort by the “far” agents, or even a miserable equilibrium through a vicious circle. Therefore, the overall effect of cronyism relies on the tradeoff between those two effects.

As a future research project, it might be empirically interesting to examine the dependence of the performance of enterprises or local governments (using as proxy the size of profit or local GDP) on the extent of cronyism (using as proxy the promotion person-time of indirect subordinates and non-relatives compared to that of direct subordinates and relatives), controlling for other variables.

Does Land-leasing Reduce Income Inequality in Rural China?
Linyi ZHANG and Yang Yao
Peking University

The household contract responsibility system implemented in the early 1980’s in rural China granted even land distribution among average households, which not only provided them with basic life necessities but also helped reduce local income inequality. However, as more and more rural labors migrate to urban areas due to urbanization, even land distribution may no longer be an optimal choice—migrant workers can’t farm their land anymore, leaving their land untended in the wild. Without the presence of a land-leasing market, such resource misallocation can hardly be corrected. Moreover, the situation of income inequality may be exacerbated since those who remain in the village have no access to the unutilized land and thus have no way of increasing their income while those who migrate to the cities get a relatively handsome pay. But we can’t easily conclude that the existence of a land-leasing market is conducive to reducing income inequality within the rural area. While the remaining farmers have more land to manage through land-leasing and can thus make more money, laborers who have urban working opportunities are now more likely to migrate considering their land concern is eliminated. If the latter experience a faster income increase, then income inequality is strengthened rather than reduced. In other words, a land-leasing market is sure to improve efficiency by reallocating land to its most productive use; however, its effect on income inequality is not so straightforward and is worth studying.

Capitalizing on the RCRE data that ranges from 1993 to 2008 and covers 13 provinces 77 villages, this research conducts an empirical analysis regarding the relationship between land leasing and income inequality in rural China. Specifically, by estimating panel models with unobserved village specific effects and by analyzing households’ land-leasing decisions on their income, using lineage information as instrumental variables, the study tests the hypothesis that while land-leasing enables many farmers to manage more land and therefore directly raises their farm income, it also increases migrant workers’ non-farm income indirectly by providing them with a stronger migration incentive. The indirect effect may well dominate the direct one and consequently exacerbate income inequality situation in rural China.

Some Topics in Forecasting Financial Asset Returns with Macroeconomic Variables
Xiamen University

Lettau and Ludvigson (2001) find that the cointegrated residual among consump­tion, financial wealth, and human wealth, cay, can predict financial market returns. We improve the prediction power of cay from two aspects (Yu Ren, Yufei Yuan and Yang Zhang (2011)). First, we apply a good proxy for human capital to estimate the cointegrating vector and obtain more reliable estimators in the small sample we consider. Second, we consider household capital (durable goods and housing asset) to be one important component of aggregate wealth and treat it differently from financial wealth. Incorporating these modifications, we find that our predictor cadh has better in-sample and out-of-sample forecast performance. Our study contributes to the literature on the relationship between macroeconomic variables and financial market.

My current research (still in progress) is as follows: When a representative agent expects higher future financial returns, on one side, she will increase current consumption, and hence current consumption wealth ra­tio (the income effect); on the other side, she will increase her current investment on financial assets, which is the substitution effect. The literature on financial return­s forecasting places emphasis on the income effect and neglects the substitution effect. However, the substitution effect is more important in empirical literature. Therefore it is of interest to test which effect plays a more important role in financial mar­ket returns forecasting. I am testing whether the current framework for United States works for China. It might shed light on the characteristics of consumer behavior and financial market in China.

Compare cadh with traditional indicator such as dividend yield, and apply non-parametric model by Chen and Hong (2011) to test robustness.  Analyze the interdependence of stock market and macroeconomic indicator with monetary policy intervention. This is based on Beaudry and Portier (2006) and Bjornland and Leitemo (2009). I plan to use Structure VAR model and incor­porate our findings as a structural restraint. Our method to calculate human capital can also be used to update the Solow residual, an indicator of business cycles.

Social Security Coverage and Household Consumption in China:
Evidence from a Nationally Representative Survey
Jing ZHOU and Yang Yao
Peking University

Compared with the spectacular economic growth, the lagged growth in private consumption has made China an international outlier: the share of private consumption in GDP has kept dropping since 2000 and collapsed to 35% in 2009. A popular explanation for Chinese household’s low propensity to consume is the small social security net.  The Chinese government has made considerable endeavor in enhancing the social security system in coping with the sluggish consumption. However, the question is: will social security enhancement significantly promote household consumption as expected?

As proven in the literature, by mitigating the precautionary motive, social security can stimulate household consumption. However, the stimulating effects may vary with respect to different households, since the same amount of social security benefits may have remarkable impact on the expenditure of low-income households while it may count for nothing for affluent households. Moreover, the households at the bottom only contribute a small part to the overall consumption; hence, it is highly possible that improving social security system cannot guarantee buoyant increase in household consumption.

Although evaluating the role of social security in promoting household consumption is not a new topic, a significant problem besets this strand of literature. The existing works rely for their results on the mean effect analysis such as OLS, 2SLS etc., while they barely probe into the heterogeneity of the impact upon different households. As illustrated before, these discrepancies are crucial for assessing the stimulating effects, and our work has made an important contribution in addressing this problem.

Based on the Chinese Family Panel Studies Data -- the newest nationally representative survey -- we employ the unconditional quantile regression to investigate the heterogeneous impact of social security across the entire distribution of household consumption. The empirical evidence strongly demonstrates the negative relationship between the magnitude of simulating effect and the level of household consumption. More importantly, using the quantile results, our calculation shows that expanding medical care insurance, pension scheme and housing fund to full coverage will engender 10% increase in private consumption and 3.5% drop in the national saving’s share in GDP, and that the traditional mean effect evaluation is upward biased.

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