Ronald Coase Institute



2012 Santiago Workshop: Abstracts



WORKSHOP ON INSTITUTIONAL ANALYSIS

DECEMBER 9-15, 2012
SANTIAGO, CHILE

ABSTRACTS

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|Bronfman|Cingolani|Connors|Delaportas|Deyo|Dumas|Gelman|Ghosh|Govorun|
|Guerriero|Ito|Kabbach|Lima|Liu|Magat|Marques|Nazrullaeva|Pinheiro|Pradhan|
|Ramos|Recalde|Rosli|Seidler|Tian|Viteri Mejia|Zhang|

Social Safety Nets and Targeting in Chile: An Implementation Approach
Javier BRONFMAN
American University

Why after 17 years of military government ruling and 20 years of central-left democratic governments has Chile not been able to grow with equity? Data suggest that the Concertación governments were not able to improve the distribution of wealth, while at the same time they accomplished so much in terms of poverty reduction and GDP per capita growth. This article explores one possible explanation of that phenomenon by analyzing how changes in then eligibility and targeting implementation policy resulted in particular social development outcomes (measured by poverty rate, inequality, and coverage). It seems that the latest adjustments made to target mechanism promoted less progressivity, suggesting an implementation failure. The focus of this paper is narrow in scope and its results are suggestive; it does not intend to claim causality but aims to primitively advance the literature of public policy implementation using data and empirical analysis. 



Exploring the ‘Perpetualness’ of State Organizations in Argentina and Brazil
Luciana CINGOLANI
Maastricht University

When looking at the current literature on the state, a somewhat puzzling observation arises: on one hand, research on state capacity has greatly proliferated over the last years; on the other, there is what Fukuyama calls ‘a strange absence of the state in political science’, referring to the lack of comprehensive studies of national bureaucracies with comparable empirical measures.

These two facts can be reconciled. While early works on state capacity were greatly concerned with the building of autonomous bureaucracies, this initial interest was overshadowed by other aspects of state capacity, more in line with the political economy agenda: its centralizing power in conflicting settings (coercive capacity), the evolution of tax revenue levels (fiscal capacity) and the enforcement of contracting institutions (legal capacity). In general, these works have focused on highly unstable polities, while there has been strikingly less interest in low to middle-income recently consolidated democracies.

The present research is a starting point of a broader agenda unraveling the endogenous determinants of state capacity in stable young democracies. It contributes to the state capacities literature in two ways: by moving beyond conflict settings, and by refocusing once again on bureaucratic capacity. For that, it will resort to the organizational perspective of North, Wallis and Weingast (2009) to explain state evolution: the passage from people- dependent state organizations to ‘perpetually-lived’ ones, in line with traditional Weberian models. It argues that this level of ‘perpetualness’ and its evolution can be captured empirically in different ways, and that it represents a critical dimension of bureaucratic capacity in young democracies. Additionally, it argues that this dimension is similar, but not entirely equivalent, to bureaucratic professionalization, meritocracy or neutrality, and that it can provide an overall good picture of the bureaucracy, with objective and comparable measures.

The work presents empirical data gathered from the central administrations of Argentina and Brazil, and shows some patterns that are informative of their recent evolution, resorting to time-series statistical measures. The results suggest interesting contrasts deserving further enquiry. 



Institutional Change Through Market Exchange
Joseph CONNORS
Duke University

How do countries with legal institutions that do not protect private property rights or respect contracts change? How can less onerous or corrupt business regulations improve? This paper argues that market exchange, specifically, international trade is one channel through which institutional change occurs. This change is brought about through the process of spontaneous order. Recent institutional research indicates that institutions matter. Projects like the World Bank Doing Business Report and the Fraser Institute’s Economic Freedom of the World Annual Report indicate which particular institutions matter. What remains poorly understood is the process by which these institutions change. 

North described institutions as the “rules of the game.” While institutions are about rules, this characterization can be misleading. Rules are created and the common perception is that the government creates them. However, over a longer time period the creation and change of rules takes on a more evolutionary nature. Hayek described this process as spontaneous order. There is no one creator of these rules and institutions. They come about through an evolutionary process of human action. Understanding this evolutionary process can be difficult. By nature it is stochastic. Thus, the direction of institutional change is impossible to predict. However, only changes at the margin of an institutional frontier are stochastic. Inside this frontier, institutional change is more imitative in nature. Using institutional data from the Economic Freedom of the World Index, this paper provides empirical support that institutional change does occur through imitation. Countries that are more open to international trade improved their institutions over five, ten, and fifteen year periods. Thus, there are two conclusions supported by these results. First, market exchange leads to the improvement of institutions. And second, it appears that aspects of the evolutionary nature of institutions are measureable.



An Institutional Economics View on the Diffusion of Wind Energy
Konstantinos DELAPORTAS
University College London

What are the institutional determinants of wind energy diffusion? This research aims to investigate the diffusion of wind energy, which I treat as an environmental innovation (commonly known as ecoinnovation). Although the issue of diffusion of innovations, and more recently ecoinnovations, has been the focus of a wide body of literature, a rigorous institutional economic approach has yet to be conducted. Moreover, traditional/mainstream diffusion researchers from the economics discipline have overemphasized the importance of profitability as the key determinant to diffusion, largely undermining the importance of institutions. Moreover, in the field of environmental innovations, the field has almost exclusively been focused on the relationship between policy and diffusion. Although both of these factors are key to the diffusion of new environmental technologies, a key element surrounding and interacting with these is the economy’s institutional framework. The importance of institutions in diffusion is elevated by the complexity of any energy system. This implies that the penetration of new environmental technologies does not simply suggest the replacement of physical facilities but rather the transformation of an entire technological system, a process that cannot be analyzed without having institutions at the core of the research analysis.

My paper aims to address this gap in literature and use the technology systems framework to investigate the barriers to diffusion of wind energy technologies. I plan to use Qualitative Comparative Analysis, a technique which will allow me to create various institutional profiles of countries that have been involved in the diffusion of wind energy, and try to understand which institutional configurations are more prone to wind diffusion and why. In terms of data collection, my dataset will include major successful countries such as Germany, Denmark, China, Spain, USA, as well as former communist countries such as Poland, Ukraine, Belarus, and countries of the Western Balkans. There are 2 main reasons for this highly contrasting country selection. Firstly, there are always benefits when analyzing extreme cases. Secondly, due to my area - expertise in the CEE-CIS region - I believe it will help me uncover the institutional characteristics and challenges of these countries. 



Occupational Licensure and Quality:
The Effect of Industry Regulation on Public Health and Safety
Darwyyn DEYO
George Mason University

What is the effect of occupational licensure on product quality? Occupational licensure is the regulation of market entry into an industry, typically one with popular public health and safety concerns. With the explosion of occupational licensing in recent decades, concerns and studies about the regulations' impact suggest outcome is actually economic protectionism, with such examples as emergency medical technicians less regulated than interior designers or hair braiders. While many studies have examined the impact of licensing on high-income occupations, such as medicine and dentistry, middle and low-income occupations are less studied.

The Shapiro model for product quality provides a theoretical foundation for this study. Imposing a product quality floor, ceteris paribus, should increase marginal and average product quality. Since occupational licensing is intended to protect the public against dangerous products, I will test whether electrician licensing has an impact on house fires to examine whether the occupational licensing achieves its goal. House fires provide an objective measure for quality, which is often hard to determine. If licensure laws work in the normative sense, I would expect the passage of occupational licensure for electricians to reduce the number of electrical fires. I would not expect for the effect to be zero, insignificant, or even positive. Evidence in the other direction would suggest that licensure laws not only reduce competitiveness but also reduce quality of outcomes for consumers. The institutions that shape licensing laws by state may also influence the outcome of product quality.          



Regulations, Regulatory Processes and Trust
Marion DUMAS
Columbia University

Does regulation undermine trust – be it generalized trust or trust in institutions and markets? At first, this seems odd: because regulations are justified by market failures, they should buttress our confidence in market exchange. However, a recent study (Aghion et al., 2010) finds a negative relationship between some market entry regulations and trust. This relationship is worrisome: as the sophistication of markets grows and our skirting of planetary boundaries intensifies, so too do our vulnerabilities and our reliance on institutions capable of mitigating them through regulation. Here, I empirically examine the feedbacks between rulemaking and trust by testing two theoretical arguments.

Aghion et al. (2010) propose a multi-equilibria model to explain the reported relationship. In low-trust societies, entrepreneurs impose externalities and bureaucrats impose bribes. People demand regulations because the associated bribes screen unproductive entrepreneurs whose social cost exceed gains. In such a society, being civic is costly: distrust pervades. In contrast, a civic society needs no regulation since people self-regulate: trust reigns. This model leaves little space for carefully crafted regulations to address the complexities of modern economies.

I first test the dualist view exposed above – self-regulation versus corrupt state regulation. Linking survey data to data on product market regulation, on environmental violations and on the accountability of regulatory agencies, I ask: 1) are regulations addressing severe market failures also associated with distrust? 2) are high levels of trust associated with lower negative environmental externalities from corporations? 3) does regulatory process, rather than content, affect trust?

Secondly, I explore the feedback of trust on regulation by relating different aspects of trust to political behavior. A balance is needed: generalized distrust compromises people’s will and ability to resolve conflicts by political action. Yet, undifferentiated trust in institutions may undermine popular oversight, also compromising the integrity of the regulatory process. I use individual-level panel data to analyze how changes in generalized trust versus trust in institutions lead to changes in a citizen’s civil and political behavior, both important components of a society’s regulatory capacity.



Independent Director in Brazil: A Case Study of an Institutional Transplant
Marina GELMAN
São Paulo Law School of Fundaçao Getulio Vargas

Is the current legal definition of Independent Director making independence relevant to Brazilian public trade companies?

The board of directors is considered to be a central mechanism for good corporate governance practice, with a view to their supervisory function of the acts of management. The full development of this monitoring role depends on conduct on the part of the independent director that can be autonomous, professional, technical, thus, independent.

The Independent Director is at the center of the debate on good corporate governance practices since he is considered to be the one who could reduce conflict of interest, protect minority shareholders from expropriation by the majority, decrease private benefits of control and increase transparency.

The Independent Director has emerged as a rule in Brazil in 2006, when the regulation of special listing segments of São Paulo´s Stock Exchange (Novo Mercado and level 2) incorporated international rules of corporate governance, including the requirement that the board of directors has at least 20% independent members.

The work argues that the definition of Independent Director in force does not consider at least two relevant aspects: (i) the existence of shareholder agreements binding the vote of the directors elected by the controlling group; and (ii) the possibility of dismissal of the Independent Director by the controlling group.

By not considering such aspects, empirical evidence identifies that there are currently Independent Directors bound to previous decisions by the controlling group, not even being able to make their own decisions, as well as Independent Directors deciding under the threat of being dismissed any moment, with no cause, by the majority shareholder.

The work concludes that the transplant of the definition of independence made it possible for Brazilian companies to avoid the presence of effective Independent Directors on their boards, making it a low effective institutional transplant case.

By highlighting a case of low effective institutional transplant, the work contributes to the literature of institutional economics as well as the development and strengthening of Brazilian capital market.



Vertical Integration As Firm Response To Electricity Shortages:
Does Transaction Cost Economics Sufficiently Explain? 
Ranjan Kumar GHOSH
Humboldt University Berlin

This paper studies the ‘make or buy’ decision for electricity by a firm facing incomplete power purchase contracts. Although transaction cost economics (TCE) contends that firms will vertically integrate a transaction-specific input under uncertainty, it largely ignores the role of firm level factors and policy uncertainty. Therefore, we expand the standard ‘make or buy’ discrete choice model to include firm level factors, policy variables and apply that to a primary dataset of Indian manufacturing firms. Results indicate that the key factors which determine whether a firm makes or buys electricity are power intensity, firm size, location, and policy uncertainty, whereas supply uncertainty does not show any significant influence.  



Getting Friendly With The Boss:
Political Consolidation, Personal Connections, and the Choice of Lobbying Strategy
Andrei GOVORUN, Israel Marques, and William Pyle
National Research University - Higher School of Economics

How does political competition shape the way that firms pursue the laws and regulatory changes that they desire? Making a distinction that we believe has not been well developed in prior research, we contrast firms that choose to influence policy directly, through un- mediated contacts with executive and legislative branch personnel, and those that do so indirectly, through lobby group acting as intermediaries. Assuming that the choice between direct and indirect mechanisms will depend upon the relative costs and benefits in expected value terms, we sketch out a simple theory that relates the relative costs of direct and indirect lobbying to the number of veto players in more and less democratic settings. As the number of potential veto players increases, lobbying becomes more costly. These costs can be spread across multiple firms if collective strategy is chosen. The tradeoff, however, is that the types of policy changes become constrained by the preferences and objectives of their fellow association members.

We test this implication by using a multi-level hierarchical design and data from a 2010 survey of 1013 Russian firms across 61 regions and a regional level dataset. The data contains answers to the direct question about the channels that firms use to influence laws and regulations and the questions about the connections of firm managers to regional elites. For the variation in political environment we exploit the substantial variation in regional governance across Russia, assuming that the more open and democratic settings should have more veto players than more closed and autocratic settings. As proxies for number of veto players we use different measures of political competition – the results of regional and federal parliament elections and press freedom. 

Our data show that firms in more politically competitive environments, where veto players are apt to be more numerous, are more likely to use business associations when trying to influence their institutional environment. In less competitive environments, on the other hand, Russian firms more frequently report approaching government personnel directly. 



Democracy and the Labour Share of Income: A Cross-Country Analysis
Marta GUERRIERO
University of Manchester

Do democratic political systems allow workers to appropriate a higher share of national income? If so, what are the mechanisms via which democracy generates a higher labour share?

The labour share of income is a measure of functional income distribution which shows how much of national income accrues to labour. Using data from the UN National Accounts Statistics and the ILO Yearbooks of Labour Statistics, I compile an extensive dataset of the labour share across 89 countries - both developing and developed - over the period 1970-2009. The data vary considerably not only over time but also - and in particular - across countries. Functional income distribution, similarly to income inequality (Li, Squire & Zou 1998), seems to be determined by factors which change substantially across countries but tend to be relatively stable within countries.

This research intends to shed some light on the long-run and political economy determinants of the labour share of income and to present some evidence supporting the case for the quality of institutions. Three channels are identified. First, democracies may directly increase the bargaining power of labour by allowing greater freedom of association and political participation. Workers may have stronger unions, and consequently obtain a range of legislations more partial to their interests (Rodrik 1999, Palley 2005). Second, democracies are generally believed to increase the demand for redistributive taxation. Regular, free and fair elections allow workers to vote for parties that privilege redistributive platforms, in particular increase taxation on producers (Bollen & Jackman 1985, Acemoglu & Robinson 2006). Third, democracies tend to avoid entry barriers against new entrepreneurs (Acemoglu 2008) as well as other economic policies which may be beneficial to the rich majority (Li, Squire & Zou 1998).

I intend to test the validity of these three channels using cross-section and panel data regression methods. My results aim at qualifying and extending previous findings on democracy and income distribution. This research will contribute to the understanding of income inequality, as well as the connections between macroeconomic and microeconomic measures of economic performance. 



The Strategy Of Contracts: Power and Appropriation in the Orange Juice Sector
Nobuiuki Costa ITO and Decio Zylbersztajn
University of São Paulo

Brazil and the USA are worldwide leaders in orange juice production. Although the final products are close substitutes, the organization of transactions between farmers and processor industries in those countries are significantly different, especially in terms of contract design. The research attempts to explore one of the possibiliies of pre-contractual opportunistic behavior, which is to affect strategically the contract design to appropriate rents. Thus, the research is positioned in the intersection between the economics of property rights and strategic management. The starting point is the assumption that an asset is a set of attributes and, when a firm is able to impose the rules in the contract (e.g. payment methods), named contract power, its choices of contractual forms influence the property rights allocation in its own favor. The project develops a specific theoretical framework based on Barzel’s economic analysis of property rights.

A case study comparing São Paulo and Florida orange juice sectors provides preliminary empirical evidence of this practice. We analyzed price behavior of orange juice and boxes of orange through time in São Paulo and Florida. We argue that contract power in São Paulo enables processor industries to affect the design of contracts in two ways: (1) avoiding the directly link between juice prices and box of oranges prices, using different units of measure – brix and box of oranges, respectively; (2) defining overestimated rates of conversion in contracts, underpricing the boxes of oranges. The preliminary results indicate that Brazilian contracts were used in the strategic sense, in order to appropriate rents through contract design. These results motivate deeper investigation. The understanding of the strategic use of contracts has potential implications for private strategy formulations, as the protection against contract power or the strategic use contracts can be an important source of competitive advantage. Furthermore, given CADE intervention in Brazil and the lack of long-run effectiveness of the intervention the concept of contract power can guide new intervention forms and public policy formulation. 



Essays on International and Comparative Corporate Governance
Luiz Ricardo KABBACH DE CASTRO
Adolfo Ibáfiez University

Corporate governance relates to the ways in which firms’ suppliers of resources may have a return on their investment. Therefore, Aoki (2001) defines corporate governance as a “structure of rights and responsibilities among the parties with a stake in the firm,” which includes parties such as suppliers of finance and other groups and individuals who can affect or be affected by the firm’s value creation and transfer. Among these suppliers, there are the “owners” of the firm, persons who share two fundamental rights. First, the cash flow rights give to the owners the right to appropriate the residual earnings. Second, the control rights are associated with the voting rights and ultimately with the residual claim to the decision-making. Although it is well understood that owners have important implications for other corporate governance practices and for corporate strategy, there are at least two unresolved questions in the corporate governance literature. First, what factors determine cross-national differences in corporate ownership patterns? Second, what are the consequences of these corporate ownership patterns on other governance practices such as the structure, functions and behaviour of the board of directors?

Scholars from different disciplines have stepped in to answer these questions (Gourevitch, & Shinn, 2005; Gilson, 2006; Demsetz & Lehn, 1985) but have not reached a unified conclusion. Therefore, the purpose of this study is to explore the antecedents and consequences of ownership structure. Three essays compose this project on International and Comparative Corporate Governance, seeking to better understands corporate ownership, their patterns and consequences, across multiple countries - we move away from the Anglo-American context to incorporate emerging markets in Latin America and Western European economies.

To achieve these goals we propose to empirically test the following research questions: What are the differences and similarities in the corporate ownership concentration across Latin American countries? Do different sources of uncertainties explain firm’s degree of ownership concentration, at both institutional and firm levels? How does corporate ownership affect the firm’s governance mechanisms such as the separation between voting and control rights and the non-compliance with corporate governance codes? 



Regulation in the Brazilian Banking Industry: A Study of a “Fundamental Dilemma”
Afonso Carneiro LIMA
University of São Paulo

The banking sector in Brazil, though considered highly efficient and a reference in various operational aspects, has been criticized by its high fees charged on financial services as well as its deficient customer service, placing it as one of the leading industries facing consumer complaints in Brazil. Does the industry need more regulation?

The purpose of this doctoral research is to investigate the consequences of banking regulation in Brazil, specifically a dilemma which involves, on the one hand, limitation to the free functioning of markets, restriction to entry and higher profits and, on the other, transparency, liquidity of the monetary system and quality of financial services to businesses and individual clients. An important aspect of institutional economics is how government regulation affects competition, and this research has been motivated by recent changes in the Brazilian banking environment such as progressive reduction of historically high basic interest rates, new technologies, internationalization, and of course, regulation, all of which seem to be affecting the prevailing business model.

How has regulation affected competition and consumer welfare? This research will investigate how regulation has influenced competition and welfare by using multiple regression models. Moreover, it intends to bring forth scenarios of competition in the industry. For this, it will draw on a Delphi panel involving three different groups of respondents: financial executives, professionals of regulatory agencies and representative institutions, as well as academics and specialists. In this way multiple perspectives concerning the theme should be elicited. Computer-assisted qualitative data analysis will be useful in assessing interview responses as well as documents and industry reports. The relevance of this research engages not only the construction of a well-based scenario for the Brazilian banking industry but also a greater understanding of the effects of banking regulation on competition and competitive strategy of commercial banks in an emerging economy.



The Gender Difference in Intra-Household Resource Allocation and Health Status:
Based on China Rural Medical Consumption Data
Fang LIU
Fudan University

According to the National Health Services Survey in 2003 in China, 14% of those surveyed refused outpatient services when sick. In rural China, given the absence of health insurance and limited health care facilities, rural families face even severe tradeoffs in deciding who should take the medical resources first. Besides, with the fast economic transition in China, traditional agricultural labor forces are observed transforming to non-agricultural department as migrant workers, which greatly improves labor productivity and GDP. However, we observe that women have a disadvantage in entering non-agricultural jobs, probably because of their education level or traditional family jobs as caregivers.

In this paper, we try to analyze how Chinese rural families distribute medical resources and labor efforts to family members according to their gender and health endowment, and finally figure out the overall impact on health status. We use China Health and Nutrition Survey (CHNS) data between 1991 and 2006, which contains a sample of 3400 households with a total of 13,000 individuals in nine provinces.

From the empirical estimation results, we find that (1) medical resources are more likely to be allocated to those who have higher health endowments, regardless of gender. However, males have a higher possibility to get health care when sick than females when they have the same health endowment; (2) agricultural jobs are more likely to be assigned to women with higher health endowments. Men, regardless of their health endowments, are more involved in the non-agricultural jobs, which are known as jobs with lower labor intensity and less health costs; (3) affected by both medical resources and labor effort, it turns to be the “compensation effect” for females, which means health status finally converges from the initially highly dispersed health endowments. And it remains “reinforcement effect” for males, which means their health status becomes more volatile at last.



Judicial Independence: Evidence from Supreme Court Cases in the Philippines
Janica D. MAGAT
University of the Philippines

Is the Philippine Supreme Court independent of the Executive? This study examines patterns of decision-making in the Philippine Supreme Court through cases involving the government, its agencies, and their representatives to identify the independence judiciary from the executive who appointed them. Using data on the Philippine Supreme Court from 1970 to 2003, we show whether Supreme Court Justices act strategically in order to be appointed as the Chief Justice, by favouring the appointing Executive in its decisions. The hypothesis is that there would be a significant difference in the way justices would decide on cases involving the government prior to the years where there is an anticipated change in Supreme Court leadership – prior to the change in Chief Justice, decisions are more likely in favour of the government, whereas this tendency disappears after appointment. The patterns of individual justices’ decisions are drawn and analyzed as an attempt to capture the extent by which the justices encapsulate the executive. 

We examine 3,409 constitutional, civil, and criminal cases involving the government, corporations, and individual litigants, randomly selected from the period 1970-2003. We look at two outcome variables: (a) whether or not a case is reversed and (b) whether a particular Chief Justice votes for reversal, and see whether there is a significant difference in the probability of reversal in cases involving the government as appellant and as respondent in the 3-year period prior to the Chief Justice’s appointment. We also look at the voting patterns of the Chief Justice compared to the Associate Justices.

We expect that the significant difference in the probability of reversal for government cases in general, as compared with other cases, captures some systematic advantage of governments to win cases. We also expect that there would be no significant difference in the probability of reversal for generally all cases prior to and post Chief Justice appointment. 



Leveling The Field: Autocracy, Democracy, And Demand For A Social Safety Net
Israel MARQUES
Columbia University and National Research University - Higher School of Economics

Do institutions shape the preferences of individuals over the welfare state? Most studies of preferences for the welfare state have focused on individual level predictors of support in wealthy, democratic OECD countries. While useful, this research agenda has not explored how country level institutional context shapes individual preferences. I build on recent advances in the literature on autocracy to show how autocratic institutions have strong implications for demand for the welfare state. According to Haber (2007) and Gehlbach and Keefer (2012) a key problem for autocrats is establishing a credible commitment to not expropriate those outside the ruling clique or party. By implication, most individuals face uncertain returns on investments, whether in business or developing skills for the labor market, because of the constant threat of expropriation. Building on work that relates support for the welfare state to incentives for highly skilled workers to insure against income volatility and unemployment (Iverson 2005), I argue that individuals whose skills and business investments should generate high returns under democracy are uncertain about returns under autocracy. To insure against expropriation and income volatility, they are much more likely to favor a publicly financed safety net than similar individuals in a democracy.

To test this hypothesis, I employ a 2006 survey of 28,000 individuals in 28 countries, the Life in Transition Survey, which provides a question on attitudes towards the welfare state, my dependent variable. Using a multi-level, hierarchical probit model, I test whether the effect of various measures of skill at the individual level – education, job type, and employment experience – on welfare state support differ based on variation in degrees of democracy – using the Freedom House, Polity IV, and Voice and Accountability indices. I then explore the mechanisms underpinning variation by disaggregating the Polity IV and Voice and Accountability indices and using alternative measures to the subcomponents. Preliminary results support my hypotheses – levels of democracy condition the effect of skill, and proxies for executive constraint and rule of law largely drive results. This work has important implications for our understanding of preferences under autocracy and welfare state formation and reform.



Criminal Persecution of Business in Russia’s Regions: The Role of State Violence
Alexey Baranov, Evgeniya NAZRULLAEVA, and Andrei Yakovlev
National Research University - Higher School of Economics

Does state violence influence economic activity? Following the approach introduced in North, Wallis and Weingast (2009) on the role of violence in economic behavior, we test empirically whether criminal persecution of business has a strong impact on economic development in Russia’s regions. Law enforcement officials at different agencies have significant discretion and strong incentives to abuse their office for economic gain. Volkov (2002) and Novikova et al. (2010) discuss the negative impact of law enforcement practice on economic behavior, but those studies do not provide an empirical test of the impact that persecution practices have on economic activity, given the existing institutional framework. The main goal of our paper is to fill this gap and to add to the growing literature on violence and economics. 

We use a unique database of the ICSID (HSE), which contains statistics on economic crimes in Russia’s 83 regions from the Ministry of Internal Affairs. We have collected and coded the biographies of regional elites (in particular, governors and heads of regional police departments). We also use the region-level data on socio-economic indicators. Our database covers the period 2000 – 2010.

Our research goals are, first, to test whether criminal persecution has a substantial influence on business activity during the 2000’s, and, second, provided that it does, we try estimating potential losses. The dependent variable is proxied by private investment per capita and the ratio of new firms to total firms in a region. The criminal persecution indicator is measured as the number of economic crimes per million Rubles of GRP or per 1,000 firms. We control for turnover both in heads of regional police departments and governors, and for overall policy changes at the federal level. We include “hard” factors (infrastructure, industrial structure, etc.) and spatial correlation. Our estimation strategy is a dynamic panel- data model with spatial effects and instruments to account for reverse causation between business activity and crime rates. Preliminary results indicate that criminal persecution has indeed a significant negative effect in terms of private investment. Therefore, deterring these practices at the regional level is crucial for economic development in Russia.



Electoral Rules and Protectionism: Assessing How Electoral Institutions Affect Tariff Levels
Flavio PINHEIRO
University of São Paulo

The aim of this work is to evaluate the effect of electoral institutions on trade protection. Some authors present evidence that countries with small districts are more prone to adopt protectionist measures. This idea is plain and quite intuitive: in large districts where politicians are elected to represent a diverse group, they would be more capable of implementing broad programs, attentive to general public goods, such as free-trade measures. On the other hand, those elected in small districts would be accountable to a narrow group of citizens, and therefore more vulnerable to special interests and prone to implementing policies that would benefit few, such as protectionist measures. The argument’s corollary indicates the association between majoritarian systems and a protectionist bias. Recent empirical studies, however, indicate different conclusions. In this context, I argue that although there is a quasi-consensus on the literature that electoral rules matter, competing theories and mixed finding prevail.

I intend to solve the empirical and theoretical puzzle involving political representation and protectionism by offering and testing an alternative explanation. My answer lies in the Stigler-Peltzman analysis of regulation, formalized by Chang et al. in Electoral Systems and the Balance of Consumer-Producer Power (2010). Adapting their model, I assume the existence of a political dispute between producers, who seek trade protection, and consumers, who demand free trade (lower prices). In this scenario, politicians, who are responsible for establishing the very regulation that determine tariff levels, simply desire to maximize their political support. Taking into account that majoritarian systems are more responsive to voters, politicians elected according this system are considered pro-consumer, and are more prone to introduce incentives to lower tariffs levels than those elected according to the proportional rule. From this perspective, and contrary to the theoretical prediction about the impact of electoral rules on trade policy, it can be stated that the more responsive an electoral system is to the voters, the lower the tariff levels will be. Using a 20-year panel dataset of democratic countries, I test the influence of electoral systems’ level of responsiveness (electoral disproportionality) on tariff means and peaks.



The Effect Of Microinsurance on Solidarity and Risk-Sharing:
Experimental Evidence from the Philippines
Shailee PRADHAN, Christian Biener, Martin Eling, and Andreas Landmann
University of St. Gallen

In many developing countries, informal rules of the game play a more important role than formal institutions. A relevant question in such a context is how economic activities that are carried out within an informal set of rules and norms are affected by the introduction of formal institutions. 

Our research addresses this question by analyzing the introduction of a formal insurance product on social norms in the Iloilo province of the Philippines. A vast majority of the population in developing countries is without formal insurance and relies on informally organized solidarity for risks such as illnesses, accidents, natural disasters, unemployment etc. However, informal mechanisms do not provide full coverage of risks and many are still excluded. Microinsurance initiatives have started to spring in many places to fill this gap, but a critical issue with formal insurance in developing countries that has generally been overlooked is the possible crowding out of informal risk-sharing mechanisms and solidarity in social groups.

Most microinsurance research to date focuses on insurance purchase as an individual decision; however, group-based schemes may have the potential to preserve existing informal social group solidarity and avoid crowding out effects. Some microcredit groups have made use of social ties to ensure repayment; group-based insurance may be an equally good way of addressing problems resulting from informational asymmetries and high transaction costs. 

We investigate different aspects of group-based microinsurance through a lab experiment in the field. We consider solidarity transfers as an informal risk-sharing mechanism. The setup of the experiment is a combination of a solidarity game with insurance choice. Theoretically, group-based schemes have a great deal of potential for the microinsurance market. The true potential, however, remains an empirical question. This paper contributes to understanding the perception of group-based microinsurance schemes and, in particular, evaluates demand and solidarity transfers for different forms of group insurance.



The Politics of Production:
‘Rent Settlements’ and Institutions in the Philippine Coconut and Colombian Coffee Sectors
Charmaine G. RAMOS
London School of Economics and Political Science

What are the political conditions that enable the emergence of value-enhancing state- mediated rents? My PhD project is an analysis of levies collected by the state from Colombian coffee and Philippine coconut producers, whose national organisations were authorised to decide on the uses of the levies. I investigate the role played by the producers in shaping what I call the ‘rent settlement’ (i.e., the assignment of access to rents) associated with the levies and extent to which it explains why the mobilisation of these levies may have performed more developmental functions in Colombia than the Philippines.

In the workshop, I will present an analysis of the political underpinnings of the institutions regulating the rent settlement in the Philippine coconut sector (c. 1970-2000). I define these institutions as the rules and enforcement mechanisms used to assign and control access to associated rents. My findings are based on an archival analysis of formal rules (i.e., presidential decrees, legislative acts and judicial rulings) governing the collection, mobilisation and management of coconut levies; and a historical analysis of the role played by political agents in shaping these rules. I will show that because of a weakly consolidated and largely unaccountable coconut producers association in the Philippines, levy contributors had difficulty shaping the institutions around the productive goals and welfare needs of the coconut sector. In the formal and informal institutions determining access to rent streams, and in the political processes in which they were negotiated, the long-term imperatives of production were largely superseded by the short-term prerogatives of executive authority. Thus, the rent settlement associated with the coconut levies in the Philippines was unstable and quite unpredictable -- vulnerable to periods of capture and contestation.

My project utilises as one of its philosophical starting points the view that institutions -- in the cases I’m studying, the structure of rights to rents -- could be seen as a result of bargaining among coalitions of economic and political actors. Thus, I develop a methodology for investigating the political origins of institutions and how complicit these are in the promotion or negation of larger processes of economic development.



Local Leadership and the Voluntary Provision of Public Goods: Field Evidence from Bolivia
Maria P. RECALDE
University of Pittsburgh

We conduct a controlled field experiment in 52 communities in rural Bolivia to investigate the effect of local authorities on voluntary public good provision. In our study setting, community members pool resources to provide environmental education material for local schools. We find that democratically elected local authorities increase public good provision when they lead by example. The results are driven by two margins: (1) authorities increase their own contributions when they are called upon to lead, and (2) they crowd-in the contributions of others. Both effects are stronger when authorities, as compared to randomly selected community members, make an initial visible contribution. We explore two mechanisms underlying authority influence. First, the characteristics of elected authorities are correlated with greater influence by non-authority contribution leaders. Second, information signaling about the quality of the public good cannot fully explain authority influence.



Institutional Failures in the Patent Marketplace: A Case of UK ICT Firms
Ainurul ROSLI
University of London

This study looks into patent transaction governance – when rights to use resources are transferred or shared (Williamson, 1985, 1996) through buying, selling, in-licensing, out- licensing, cross-licensing and pooling in the patent marketplace. It covers an in-depth investigation into the obstacles that firms experience when exchanging patent for value creation, where previous literature has tended to pay attention to very few type of obstacles, such as patent troll and patent reform (where mainly on ex ante issues which focus on the need to change the standards and enforcement by which patents are granted), see Burk & Lemley (2009); Shapiro (2001, 2006); Kingston (2001).

In order to illustrate further the extent to which the institutional factors affect the way in which patent marketplace work, the paper investigates the following research questions:

What are the obstacles that firms in the UK ICT sector encounter when participating in the patent marketplace? 

To what extent are the obstacles experienced by firms specific to certain governance structures (buying, selling, in-licensing, out-licensing, cross-licensing, and pooling)?

Through surveys and interviews, a case study approach of thirteen UK ICT firms is used. The result shows that firms encounter a variety of obstacles related to market search problems (e.g., finding users or owners of patent or “best patent”), lack of patent market transparency (e.g., in relation to novelty and value), difficulties in contract negotiation and enforcement, problems with regulations and with firms’ practices. The results suggest that problems tend to be concentrated in certain areas (transparency and contract enforcement problems) regardless of any patent governance structures. Only search problems and regulation and practices problems are experienced through certain type of governance structures. Further analysis shows that the firm’s attributes such as size and technological focus somehow have an effect on the type of obstacles firms experience. This paper further expands the literature by explaining in greater detail which types of problems are more likely to be experienced by SMEs and larger firms. In particular, SME firms find it more difficult to access the economic value of patents (transparency problem), whilst larger firms find contract and enforcement problems to be more challenging. 



Institutional Transplants and Bureaucratic Elite:
Revisiting The Transplant Effect and Its Impact On Institutional Development
Valentin S. SEIDLER
University of Vienna

Despite an emerging consensus among economists that institutions are important for long- run economic development, we have only limited knowledge of why transplanting successful institutional arrangements is not inevitably successful. Empirical research (Berkowitz et al. 2001) indicates that the law imported from Europe has been little effective unless adapted to existing local context or unless there has already been some level of familiarity within the population. 

Institutional theory claims that the local (informal) institutions are persistent and stable over longer periods of time (Williamson, Ostrom). Imported (formal institutions) may struggle to overcome this persistence which makes adaptation necessary.

Little research has been done so far on factors which promote the process of institutional adaptation. Analytical narratives (Spranz et al., Zweynert, Seidler) – although contextual by nature - indicate among others that the availability of European educated bureaucrats may have played a crucial role in adapting imported institutions to local conditions. Other important factors are levels of education and urbanization. 

This study empirically tests the relation between successful institutional adaptation and strong institutional quality today in a sample of 95 former colonies. For a typical former colony, the decade before independence and the decade thereafter is the period of most intensive institutional transfer. The availability of a highly educated bureaucratic elite from the metropolis around independence will be constructed for each country. Levels of urbanization, education and other common factors will be controlled for. The data for institutional quality is taken from Worldwide Governance Indicators Project compiled by Kaufmann, Kraay and Mastruzzi. 

The research shifts the focus towards contextual factors which promote cultural adaptation of imported norms and thus influence the quality of a country’s modern institutional framework. The findings may have policy implications for international development agencies.



Impact of the Cultural Revolution of China on Human Capital:
Evidences from CHARLS National Baseline
James P. Smith, Meng TIAN, Yaohui Zhao
Peking University

The impact of the Cultural Revolution (1966-1976) on the economic system in China was enormous; especially the education reforms associated with the Cultural Revolution produced marked changes in Chinese society. In this paper, we focus on two questions: what’s the impact of the “great Chinese Cultural Revolution” on education. Is the education shock from Cultural Revolution persistent? Using China Health and Retirement Longitudinal Study (CHARLS) 2011-2012 National Baseline data, which covers a nationally representative sample of Chinese respondents 45 or older. We find that Cultural Revolution (CR) significantly reduced the education attainments of those who were of school age during 1966-1977, and education shocks by CR were only temporary. We also find them more likely to invest in continuous education to make up for their interrupted schoolings and take advantage of new opportunities provided by the economic transition, and urban cohort were more likely to do so than rural cohort. For those who didn’t reinvest in their human capital, especially in rural areas, they are more likely to be in unfavorable SES and health conditions at an older age.


Individual Tradable Quotas in Complex Ecosystems: How Does Biomass Negative Shock Affect Individual Decisions? An Experimental Approach
César VITERI MEJÍA, Sylvia Brandt, María Alejandra Vélez, and María Claudia López
University of Massachusetts Amherst

The ecosystem’s intrinsic uncertainty can affect the performance of economic instruments designed to manage common pool resources. This is the case of Individual Tradable Quota Systems (ITQ) used across many fisheries around the world. In the context of climate change, natural scientists study the process to disentangle the complex ecosystem mechanisms that governs variation on fisheries biomass, but no work has been done to understand how this variability affects both fisherman’s catch decisions and ITQ’s efficiency. This paper aims to highlight this interaction based in a set of economic experiments that illustrate a dynamic common pool resource problem in the context of ITQ trading, imperfect quota compliance and negative ecosystem shocks. Contrary to the model prediction and ITQ’s literature, individuals harvest over their allocated quotas. Price relative deviation from the predicted equilibrium is not different from zero in normal biomass conditions, but this deviation increases due to the occurrence of a negative biomass shock. 

Keywords: Common pool resources, individual tradable quotas, fisheries, ecosystem variability, coupled systems. `



Composition Of Firms, Upgrading in Industrial Agglomeration and Regional Policy In China
Cui ZHANG
Jinan University

Recent studies show that industrial agglomeration can enhance technology progress. However, these studies normally focus on the “average” impact of industrial agglomeration and implicitly assume that the effect of agglomeration is homogeneous for all firms located in agglomeration, ignoring substantial productivity differences among establishments. This literature also omits the fact that the source of technological progress is dual. It is the result not only of the adoption of existing technologies but also of innovation. So it is reasonable to assume that different firms choose different upgrading paths according to their own situations; in particular, low productivity firms are more likely to imitate than to innovate. Once taking into account endogenous firms’ distribution of these two activities, the impact of agglomeration on technological progress should depend on the composition of firms within an agglomeration.

The purpose of this project is to illustrate how industrial agglomeration may have unequal effects on heterogeneous firms’ technology progress by using the method of distance to the technological frontier and micro-level plant data from China. We show that the contribution of agglomeration to technology progress can be separated into a level effect and a composition effect. Holding the composition of firms constant, an increase in agglomeration aggregate level is always technology-enhancing. However, holding agglomeration level constant, the technology-enhancing properties of agglomeration depend on firms’ composition. In particular, we show that agglomeration helps backward firms obtain the spillovers from advanced firms to realize upgrading. Since advanced firms are closer to the technological frontier, the potential for catching up is very small, so their technological improvement is based on innovation, which makes agglomeration spillovers' contribution to their upgrading smaller. We argue that regional innovation systems, i.e. agglomeration ‘surrounded’ by supporting local organizations including high-tech service sector, financial sector and institutional infrastructure, can support advanced firms' perpetual innovation, leading to self-reinforcing mechanisms based on localized increasing returns. There are clear policy implications of this project in terms of institutional arrangements directed towards innovation and technological change of firms and agglomeration.


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




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