Ronald Coase Institute



2013 Xiamen Workshop: Abstracts



WORKSHOP ON INSTITUTIONAL ANALYSIS

DECEMBER 8-14, 2013
XIAMEN, CHINA

ABSTRACTS

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|Bali|Calderon|Ekshtein|Gao|Goyal|Honsowetz|Jiang|Kim|Kokstaite|
|Kuchar|Li|Liu|Ma|Malchar-Michalska|Malkov|Mmopi|Ouyang|Shih|
|Song|Spengler|Szakonyi|Teague|Wang|G.Yang|J.Yang|Zhang|

Institutional Determinants of Healthcare Expenditure
Azad Singh BALI
National University of Singapore


Cross-national longitudinal studies find that national income and demographic characteristics are the most significant determinants of national healthcare expenditure (NHE). Both variables are exogenous in the medium term to policymakers that seek to control ballooning healthcare costs. Moreover, there are significant variations in NHE across countries with similar incomes and population structures.

This paper advances an alternate thesis on the determinants of NHE. The paper argues that the institutional design of the health system, particularly that of financing (how healthcare is paid for) and provision (how healthcare is delivered) mechanisms, gives rise to incentive structures that need to be coordinated to better control healthcare costs.

Health economists largely dismiss the institutional design of provision arrangements as provision is regarded as a contractual governance arrangement. However, this paper argues that provision arrangements in combination with financing arrangements give rise to incentive structures that impact healthcare costs. The misguided attention of policymakers in designing efficient financing contracts that minimize the welfare losses caused by information asymmetry and moral hazard in healthcare markets, while paying scant attention to the overall institutional design of health systems, is a fundamental cause of rising healthcare costs.

The paper uses the IAD framework, mixed-methods (large n-regression and case studies of China, Thailand, Vietnam, Indonesia, Singapore, Hong Kong) in operationalizing the impact of institutional design on NHE.

One of the hypotheses that the paper explores is:
Dominant public financing of healthcare, dominant private provision, and fee-for-service is a significant determinant of healthcare expenditure

[If healthcare is provided at private hospitals, paid for by the government, and providers are reimbursed on a fee for service basis, providers are incentivized to over provide services.]

This paper aims to make two contributions: it aims to theorize the impact of the institutional architecture on healthcare expenditure; and it explores to what extent variations in institutional structures impact healthcare spending. The latter is of extreme relevance to policymakers who face rising healthcare costs and have limited fiscal space to finance them.



“No Blame, No Shame.” The Effect of the Absence of Antitrust Liability
on Anticompetitive Regulations: A study of Antitrust Immunity
in Local Government Health Care Services in the U.S.
Andres CALDERON
Pontificia Universidad Católica del Perú


Do local governments enact more anticompetitive regulations because they are practically immune from the enforcement of antitrust laws?

Given that antitrust law is normally concerned with restraints to competition caused by private businesses (collusion, monopolization, mergers), this research projects aims to contribute with existing literature that analyzes public restraints to competition, ranging from anticompetitive behavior coming from state-owned-enterprises (SOE), to discriminatory rules and discriminatory adjudications in public bids or in the grant of licenses and permits.

Existing literature, based on public choice, has studied the incentives that SOE have to engage in anticompetitive practices. But besides SOEs, most antitrust Laws and courts around the world have not expressly recognized the application of antitrust laws to governmental entities and officials. In contrast, some laws and judicial doctrines have granted total or partial immunities to some governmental entities and activities.

My research project is concerned with the effects of one example of antitrust immunity. I focus on the effects of the passage of the U.S. local government antitrust law in 1984, and the U.S. Supreme Court decision in the Town of Hallie case in 1985. These two decisions greatly reduced the possibility of imposing liability (i.e., monetary damages awards) on local governments engaging in anticompetitive practices and on private business participating in anticompetitive conducts that were covered under the umbrella of local government regulations (hereinafter, both or any of them, anticompetitive regulations). The U.S. Federal Trade Commission has published several studies and statements on the negative effects for market competition and consumer welfare coming from these anticompetitive regulations in the healthcare market.

The evidence for this research is based on the passage of anticompetitive regulations by local governments in the U.S. before and after 1984 in the health care market. I will look into two sets of results in two groups of 50 random and comparable cities in the U.S.: i) the enactment and proliferation of anticompetitive regulations; ii) the prosecution of anticompetitive regulations by the federal antitrust agency, the U.S. Federal Trade Commission. My hypothesis is that the immunity favored the increase of local government anticompetitive regulations.



Regulatory Fixation and Interest Groups:
Empirical Evidence from Securities Regulation
Asaf EKSHTEIN
Tel Aviv University


Various forces undermine efficient regulation. Yet two forces are the most prominent: cognitive biases and undue external influences. Cognitive biases, usually explained by behavioral literature, may cause the regulator to adhere to her decisions even when changes are necessary. Undue influences, usually associated with public choice theory, describe the power and leverage of narrow interest groups on the regulator to ensure favorable regulation at the expense of public welfare. This essay examines the effects of these two forces on the Israel Securities Authority (ISA) rulemaking process during the years 2003-2010. The ISA process provides us with a unique opportunity to examine both forces. Since the ISA has limited rulemaking power, its legislative rules must pass through three stages that together last almost two years. At stage 1, a rule is valid for one year but can be extended for an additional year if the ISA considers its extension essential and with the consent of Minister of Finance (stage II). Within two years of passage, the ISA can request that the Minister of Finance and the Knesset (Israeli parliament) Finance Committee anchor the rule into secondary legislation (stage III). If the rule is not anchored into secondary legislation it expires. At each of these stages, the rules are published for public review.

The Article shows that majority of ISA rules pass through all three stages without material changes and points to this as evidence of ISA fixation and ISA immunity from public choice pressures. This conclusion is sustained by a review of ISA plenum protocols, which reflect stages 1-3 plenum discussions; Knesset Finance Committee protocols, which reflect the Committee discussions at stage III, and a comparative analysis of American Securities and Exchange Commission (SEC) rulemaking in the years 2006-2009. The essay explains the aforementioned conclusion by noting ISA institutional features, with an emphasis on ISA rulemaking’s lack of transparency and other procedural safeguards; lack of ISA supervision by legislative, executive, and judicial branches; and lack of participatory and supervisory mechanisms within ISA internal structure.



Does Cultural Segmentation Caused by Administrative Division
Harm Regional Economic Development in China?
Xiang GAO and Cheryl Long
Xiamen University


Current province-level administrative division in China breaks the distribution of local culture, and many cities are separated from their local culture region to locate in other provinces. These cities encounter potential cultural conflicts with the mainstream culture of the provinces they belong to, but also face various local protectionism barriers with neighboring cities in the province that shares the same border and local culture with them. As a result, transaction costs could be higher for them whichever side they trade with, leading to potential harm to their economic development. Using dialect as a proxy for local culture, we find that intra-provincial cultural differences caused by this kind of cultural segmentation can significantly lower economic growth of the separated cities. This negative effect is aggravated by greater local protectionism in neighbor provinces but alleviated by a longer history of the current administrative division. These findings support the hypothesis that cultural segmentation caused by administrative division and local protectionism work together to bring about substantial economic loss.



Trade Credit in Informal Markets:
Evidence from an Indian Footwear Industry
Yugank GOYAL
University of Hamburg


How do poor suppliers in informal markets offer large trade credits, and why don’t they seek bank lending if the trade credit is costlier? I attempt to answer these questions through the institution of credit-slips in the largely unorganized and sizeable footwear industry of Agra, which helps maintain a system of credibility and liquidity. Poor unorganized shoemakers in Agra have to supply their products to the traders on credit, even though they are significantly credit constrained. The trader who purchases the footwear issues a credit-note to the shoemaker, which acts as a contractual promise, to be redeemed on the date mentioned on it. At the same time, the market has middlemen, who buy these credit-notes at a discount (interest for the shoemaker), to solve the liquidity problem for the shoemaker. This interest rate proxies and is inversely related to the creditworthiness of the trader. Therefore, the interest rates are higher for a trader with weak credit history, which discourages the shoemaker to sell him the shoes. Hence, the credit-note trading creates an enforcement mechanism to incentivize the trader to maintain credible commitments. The information about his creditworthiness is maintained in the market due to low information asymmetry. My empirical work shows that the interest rate on credit-notes in the market is 5 percentage points higher than the bank interest rate for an equivalent loan. This is explained through the transaction costs of availing banking services, imposed due to low credit information with the banks and bribes that loan officers charge when disbursing small loans to poor shoemakers.



The 1866 Post Act: Measuring the Impact of Federal Preemption
on Competition in the U.S. Telegraph Market
Aaron M. HONSOWETZ
George Mason University


Did the 1866 Post Act, a federal regulation that preempted state law, succeed in increasing competitive pressure on Western Union, the dominant telegraph firm?  The United States federal government preempted state telegraph regulations it deemed as anti-competitive by enacting the 1866 Post Act.  The 1866 Post Act granted a de facto national charter and franchise to build and operate a telegraph system anywhere in the United States to any telegraph company organized within any state.  The act also outlawed certain types of contracts that had prohibited other companies from acquiring telegraph right of way access.  The paper shows that rival firms took advantage of the Post Act to put pressure on Western Union and render the entire industry more competitive.  This historical evidence suggests that the 1866 Post Act helped competition.



Benefit of Dictatorship:
Does Empowering the Elite Judge Decrease the Probability of Wrong Decisions?
Luqi JIANG
University of Hamburg


Does dictatorship decrease the probability of making wrong court decisions? This challenges the basic assumption of judicial decision that the dictatorial court, namely, the one judge deciding court, is less likely to make right decisions than the democratic court, namely the panel court. However, apparently it is the belief taken by the Chinese Supreme Court, as it has recently advocated a national reform to empower the elite judge with larger decision power over the other panel members, with the intention to increase the probability of making right court decisions.

This study tests whether this belief is true by examining if the reform significantly reduces the overturn rate, that is the rate of decisions reversed or changed by the higher level court, namely the rate of “wrong decisions”. The study will conduct a difference-in-differences test based on the data from a natural experiment, as some courts have already adopted the reform since different time points, while some other courts have not.

The study compares the differences of overturn rate changes between the first trial cases that are decided by the panel court in a pair of district courts from the city, one reformed and the other not, before and after the reform occurred. The study then compares 2 other pairs of district courts in 2 other cities during different time period, as the control for the selective bias in city environment and time period.

The preliminary conclusion is that the difference is statistically significant across courts of the same city, and the result is robust across cities. A possible explanation might be that, when the education level of judges does not meet the threshold, the more the worse, and a capable dictator is more likely to make the right decisions.  

This study provides some supportive evidence for the forthcoming reform in the panel court. It also suggests future research about the impact of education on court decisions, and implies that the policy benefits might disappear when the education level reaches the threshold.



Can Franchisor Efforts Be Disadvantageous to Franchisees?
Evidence from South Korea
Seo-young Silvia KIM
Seoul National University


Can franchisor efforts be disadvantageous to franchisees? This paper tests whether the public effort led by the franchisor is at the expense of its franchisees, taking the cost-sharing contractual clauses into account. Franchising is a voluntary contractual agreement between two independent economic bodies: franchisor and franchisees. Given the profit sharing and the double-sided moral hazard innate in a franchise setting, it is essential to ask how severe is the incentive conflict that arises from this hybrid organizational governance. The particular question of interest is whether advertising and promotion, the primary chain-wide input for profitability of the franchisor - henceforth, public effort (Bhattacharyya & Lafontaine, 1995) - can hurt the franchisees, as widely publicized in South Korea after a series of franchisee owners' suicidal protests.

Customarily, franchise contracts decree that public effort's costs must be shared between the franchisor and franchisees in the form of a lump-sum fee per effort or a share parameter. However, the required frequency of such efforts or their magnitude in entirety is not specified in a typical contract, exposing franchisees to information asymmetry and possibly unexpected shocks. If Korean franchisees are enjoying ex-ante rents as in the United States (Kaufmann & Lafontaine, 1992), possible damages will be mitigated. However, if their payoffs are down to their participation constraints, the increment of franchisor's public effort may be distressing enough to increase the failure of its franchisees, especially given the interfirm power asymmetry.

This paper probes this empirical question using IV/GMM approach and employing a control vector of firm characteristics. 769 franchisor-level observations were collected from South Korean Fair Trade Commission (KFTC)'s information disclosure forms, comprising entrepreneurs with one or more franchisees in the year of 2012 within 5 industrial sectors of business-format franchising. The results suggest rejection of allegations that the conflicts between the franchisor and the franchisees prevail over their coordination of incentives. Public efforts decrease the proportion of franchisee failures, using lagged profitability, entries and exits of franchisees, and franchisor commitment as instruments. This suggests that the franchisors and franchisees' incentives are well coordinated and the public effort beneficial to both.



Ethnic Division and Public Goods: The Case of Lithuania
Monika KOKSTAITE
IMT Lucca


This study is analysing how ethnic conflict determines the organization of local public finances. All Baltic States are known for their ethnic heterogeneity and, here, Lithuania is chosen for the analysis due to its highly mixed ethnic fragmentation. Historically, since 12th century the country was ethnically heterogeneous and through the ages a variety was even more growing due to unions, wars and occupations. Nowadays, ethnical mixture is still in existence. Following the preeminent study by Alesina, Baqir and Easterly, ethnically diverse jurisdictions are pro-spending and prone to higher deficits, whilst allocating less for public goods. The main indicated question of racial segregation does not work here, however, it is interesting to explore whether ethnic fragmentation really determines public goods problems and segregated and decentralized jurisdictions is the only solution overcoming the problem. As a result, the analysis of historically co-existing ethnic diversity might be a solution for indicated problem. Since municipalities are the main distributors of public goods in Lithuania, I am exploring two sets of municipalities, ethnically homogenous and ethnically heterogeneous, to reveal how ethnicity factor works for municipalities’ fiscal discipline and provision of public goods over time.



Surrogate Motherhood in the United States:
Economic Analysis of Institutional Change
Pavel KUCHAR
University of Turin


By 1978, with the invention of in vitro fertilization, the production possibility frontier due to which “children cannot be purchased on the open market but must be produced at home,” (Becker 1960, 216) shifts. Infertile couples acquired an alternative way of conceiving genetically related offsprings by means of an arrangement that would become known as surrogate motherhood. Social scientists across disciplines agree that technological change breeds institutional change. But how does this change come about? There is not an agreement about what the transmission mechanism of institutional change is. The question is important; without recognizing the role of individuals, the process of institutional change may appear mechanical.


I suggest that the agents of institutional change are entrepreneurs who make sure the available technological inventions are translated into useful innovations. This translation takes place as a result of the search for profitable investment opportunities but also, and perhaps even more importantly, by persuading other people to take part in legitimizing the new combinations made possible by technological developments. Entrepreneurs turn inventions into innovations by means of investment and legitimization. The thesis that technological change breeds institutional change through entrepreneurial activity provides a theoretical framework for identifying important factors of institutional adaptation and helps explain the behavior of agents whose actions are conducive to the change.

So as to test my contention I look into the case of surrogate motherhood. Using social survey data I show that entrepreneurs of surrogacy have been quite successful in getting other people to participate in the legitimization of surrogate motherhood. In the analysis of institutional change I control for the effects of institutional isomorphism, punctuated equilibria and path dependence employing an accelerated failure time model. The empirical analysis shows that favorable attitudes towards surrogacy were associated with faster institutional adaptation. My comparative institutional analysis examines the effect of contractual enforcement on the rate of surrogacy contracts. The analysis of IVF success rates reveals that the rate of surrogacy contracts came to be twice as high in the judge-made-law states compared to other legal categories of contractual enforcement.



How the Cultural Revolution Persistent Impacted the Sent-Down Youth—
Based on an Empirical Study of Collective Memory
Jiajia LI
Southwestern University of Finance and Economics

This paper uses China General Social Survey 2006 to empirically examine the impact of the sent-down experiences on social trust. We use principal component analysis to extract the trust level toward different social institutions. Then we demonstrate that the sent-down people do not exhibit the trust level significantly different from other social groups. With regard to the trusting objects, it is shown that those sent-down during the Cultural Revolution trust the intellectuals less, but they do not exhibit any significant difference from the others concerning trust towards other social institutions, e.g. government, news media, etc. We further establish that those “old-three-generations” (Lao San Jie) sent-down people trust the intellectuals significantly less than other sent-down people, and this distrust does not change with the latter career, social status, and receiving higher education. Therefore, this paper suggests that the distinct experience of the Red Guard of the old-three-generation leads to their persistent distrust towards the intellectuals, and proposes an explanation based on the collective memory in social psychology, which suggests that the persistent impact on the same memory and experiences among the team members.



The Impact of Highway Access on Urban-Rural Income Inequality:
County-Level Evidence from China
Chong LIU
Tsinghua University

This paper investigates the impact of highway access on urban-rural income inequality, using China’s county-level panel data from 1999 to 2008. We find strong evidence that better highway access reduces urban-rural income inequality by 12%-14%. To identify the causal effect, we rely on access to historical postal routes in Ming Dynasty as an instrumental variable for current highway access. We provide some mechanism for our finding: the improvement of transport infrastructure could lead to more migration from rural area. These migrants will send money back home which could help their family to set up village level enterprises or do some small business. Highway network makes rural and urban areas better connected. Thus rural people can share the benefit from city and then income gap reduces. For robustness check, we take the speed upgrade of railways and highway exits into account and use access to hypothetical road network as an alternative instrumental variable.



Living Standards in China between 1840 and 1912
Ye MA, Herman de Jong, and Tianshu Chu
University of Groningen and Southwestern University of Finance and Economics


This paper investigates China’s economic development between 1840 and 1912. We study living standards and economic trends in the late Qing dynasty (1840-1912) by discussing the reliability of existing estimations of per capita GDP. Also, we introduce a new estimation. In general, we find that existing studies on China’s historical GDP in the 19th century leave several puzzles; more cross checks are needed to improve on these estimations. Our own estimation provides for the first time a continuous time series based on the previous estimations. We see this paper as a starting point for future research on 19th century developments in the Chinese levels of economic welfare and performance.



The Relation between Trust among Farmers and Horizontal Integration
in Poland
Dominika MALCHAR-MICHALSKA
Opole University


Why are Polish farmers hesitant to join agricultural producers’ groups? In the mid-1990s in Poland the problem of low intensity of formal cooperation among farmers was noticed (at the same time economic conditions of farms were worsening). Meanwhile, the lack of efficient organizational structures harmed the creation of other market institutions for domestic agriculture, such as commodities exchange and wholesale markets. This became a significant barrier for development of the agricultural sector, especially when the Polish government made the decision regarding accession to the European Union, where the stage of farmers’ integration was and still is much more advanced than in Poland (see examples of Germany and Denmark). That is why in 2000, the Polish government introduced a “new” form of cooperation (horizontal integration) among Polish farmers: agricultural producers’ groups.

In spite of the financial support for these organizations, only 3% of farmers are members of these groups (1132 groups operated in September 2013). What is also important is that 80% of these groups operated in the western part of Poland. It is essential to understand why Polish farmers do not want to be members of agricultural producers’ groups. The explanation for this situation can be a lack of trust among Polish farmers, greatly impacted by the following two factors: first, the negative experiences of Polish farmers with cooperatives during the socialist period; and second, border changes of Poland (the Partitions of Poland and consequences of the Second World War). In order to answer the research question the author decided to conduct the experiment among farmers from the western and eastern parts of Poland.



The Effects of Historical Development on Contemporary Regional Education and Trust: Evidence from Russia
Egor MALKOV and John V. C. Nye
National Research University Higher School of Economics and George Mason University


Is the tendency to trust driven by the persistence of human capital and cultural conditions that are determined by earlier historical legacies? There is worldwide evidence that worldwide measures of trust are highly correlated with measures of social capital, education, and income. This paper uses historical data on agricultural income in the 1913 pre-Soviet era as an instrument for regional education in modern Russia. We find that education today is highly driven by Tsarist era farm wages even though modern day income is not correlated with historical income. In an instrumental variable regression, historical regional income is then correlated with the tendency to trust. This suggests that the legacy of early development is more important than income per se in explaining regional educational levels and the link between education and trust.



“Aapka paisa, aapke haath” (“Your money, your hands”):
The Political-Institutional-Bureaucratic Linkages Surrounding
Aadhaar-Enabled Direct Benefit Transfers in India
Matthews MMOPI
University of Oxford


In 2013, the Indian Central Government launched the Aadhaar-enabled Direct Benefit Transfer Scheme (DBTS), which aims to introduce cash transfers to the bank accounts of below-poverty-line (BPL) individuals under the various state social protection schemes. DBTS leverages a biometrics-aided system, Aadhaar or Unique Identification Number (UID), to credit welfare payments directly to beneficiaries. DBTS will relocate much of India’s BPL population into the financial markets by providing them with cash and banking services. Thus, in monetizing and digitizing welfare benefits and subsidies, DBTS represents the state’s attempt to ‘marketize’ the poor. Hence, DBTS confirms India’s reorientation to a ‘neoliberal’ conceptual framework that welcomes partnerships with market and civil society actors.

There is insufficient research in development studies that probes into the porous boundaries of the policy processes, in a ‘neoliberal’ context – and with significant overlaps between the market, civil society and the state – such as is the case in India. In questioning the policymaking of DBTS, my research wants to find out whether public-private-civil-society partnerships are seizing the realm of social protection policy. My research will unpack the ideation, public-incorporation, co-production and legitimization of this policy. It is critical to our understanding of development policy to explore the institutional setting of DBTS, for it is not clear whether the ‘state’ is actually the key driver of policy.

In short, the aim of my research is to understand the political and economic processes, institutional arrangements and effects of development policy-making in India. My research question is: How did the Aadhaar-enabled direct benefit transfer (DBT) scheme come into existence and what are the consequences for state-society relations? The emphasis will be firstly on the processes of policy agenda setting, proceduralization and implementation, secondly on the institutional forms that policy delivery takes, and thirdly on its effects on social protection delivery to the beneficiaries of public schemes.



Education Inequality between Ethnic Minority and Han Populations
in China during 1989-2006
Yusi OUYANG
University of Tulsa


Development economists interested in vulnerable groups in China have rarely paid attention to its ethnic minority people, whose population has reached 1.22 million in year 2010. For most of the time in history, however, ethnic minority Chinese were in vulnerable situations. And they still are. Close to 90 percent of ethnic minority Chinese today are peasants living in remote areas where geographical and climate conditions are not suitable for agricultural activities and relying on primitive production technologies; few of them receive sufficient education; and due to language and cultural barriers, they are less likely to emulate their Han (ethnic majority) counterparts, many of whom migrate to better developed areas and succeed in finding employment there.

Since the late 1940s, policy makers in China have developed and promulgated a series of pro-minority policies to bridge the socioeconomic gap between the minorities and the Han. Among these, economists have high hopes for education, as they believe that more years of schooling and higher levels of academic achievements increase labor productivity, and that higher labor productivity is related to higher income.

To date, minority education in China has received strong and consistent government support for over six decades, with the only exception being the Cultural Revolution period (1966-1976) during which all Chinese suffered regardless of ethnicity. It is therefore time for economists to ask: Have the ethnic minorities caught up in education?

Taking advantage of household survey data collected in nine Chinese provinces during 1989-2009, this study makes the first attempt to empirically investigate the extent and correlates of education inequality between ethnic minority and Han Chinese of different ages. Besides traditional inequality indices that measure inequalities in mean levels and distributions of educational outcome, this study also examines inequality in educational opportunity using techniques that have become available only recently; hence making this research the also first that explores inequality of educational opportunity in China.



Does the Change in Competitiveness of the Real Estate Dual-Broker Market
Correct the Principle-Agent Problem in Hong Kong?
Alex SHIH
Sun Hung Kai Properties Limited


Previous studies suggest that the real estate dual agent industry has an information asymmetry which brokers and sellers enjoy more information of the intrinsic value of a property than the buyers. However, since brokers receive more commission income as the transaction price increases, they have no incentives to suppress the price for buyers and might not disclose all negative information to the buyers during their services. The conflict of interests in the dual broker industry is often known as the Principle-Agent Problem. The institutional frameworks in which agents have the ability to exploit the buyers are found across different countries. It is essential to understand whether this imbalance could be reduced and whether there are government policies that could change this institutional rule of the dual agent industry. This study will provide possible explanations to the above questions.

This research believes the competitiveness of the agent market can alter the behaviors of the real estate agents. Their incentives to exploit the buyers will change according to the likelihood of the agents to make another deal. The hypothesis is that when an agent is less likely to make deals in a certain period, he is more likely to suppress the price for the buyers. This is because agents have a low base salary and rely their living on commission income. Thus, when the broker market is competitive, agents are more likely to compete with each other for the limited buyers in the market. They are forced to suppress the price for buyers and internalize the conflict of interests.

A linear regression model will be used in order to measure whether the competitiveness of the agent market has a significant effect on the change in differences between asking and selling price. The study also predicts the change of significant of the effect when the base salary changes.

The findings of this study provide indications of whether this institutionally distorted market can be restored by changing agents’ competiveness. It provides vital implications on labour policies such as minimum wage and regulations on monopoly as well as corporate strategies on commission redistribution.



Equalizing Education in China: Lessons Learned from Changsha
Yang SONG
University of Pittsburgh


This study evaluates an education policy aiming at improving low performing schools in Changsha, a Chinese provincial capital city with 7 million population. Since 2007, eight low-performing middle schools are assigned direct admission quota to elite high school for their top 10% students. The purpose of this policy is two-fold: on one hand, it helps these schools to attract better students; on the other hand, the top 10% quota may foster competition within these schools and possibly improves student learning. School level analysis shows that the policy-impacted schools were catching up in terms of school average performance. By exploiting the unique lottery middle school assignment system in Changsha, I compare the difference between the value-added of policy-impacted schools and that of the other schools before and after the policy. I find that there was no change in difference in value-added to students after the policy. It suggests that the school average performance improvement mainly comes from selection channel.


On Lab-Testing Mixed-Strategy Play in a Corruption Game
with Endogenous Detection
John Bone and Dominic SPENGLER
University of York


We model a three-player corruption game with a briber, an official and an inspector and test this in the laboratory. The briber can bribe or not, the official can reciprocate or not and the inspector can inspect or not. Thus, unlike most previous experimental and theoretical research on corruption (cf. Abbink et al. (2002)) we treat the probability of inspection as endogenous. Assuming self-interested and risk-neutral behaviour, the game has two Nash equilibria; one where there is no bribery, no reciprocation and no inspection; and a mixed-strategy equilibrium, in which there is corruption. Anticipating corrupt behaviour in the lab, we focus on analysing the mixed-strategy equilibrium. In the experiment we use neutral language, but subjects know that an ’accepted offer of coins’ (reciprocated bribery) bears an efficiency loss, indicating social harm. In contrast to most experiments that seek to measure behaviour in games with unique mixed-strategy equilibria, we allow for genuine strategy-mixing by letting subjects choose probabilities on sliders. In two additional treatments we vary the penalty on the official and on the briber respectively, for which theory predicts that the former decreases reciprocated bribery (corruption) and the latter increases it. Looking at treatment effects, we confirm previous research on mixed-strategy play in that little can be inferred from individual subjects’ behaviour. However, across periods and subjects, central tendencies of single parameters do change according to mixed-strategy predictions. As expected, they do so in terms of direction, but not in terms of magnitude. Magnitudes of parameter changes suggest instead that, in contrast to theoretical predictions, both punishing officials as well as punishing bribers may reduce corruption.



Renting Higher Office: The Participation of Economic Elites in Political Institutions
David SZAKONYI
Columbia University


Why do economic elites run for public office? This dissertation project looks at the incentives for businessmen to put forth their candidacy to legislative office as a strategy of promoting their firm’s interests. Building on existing work on businessmen candidates, I develop a theoretical framework that examines the delegation problem between firms and politicians at the heart of a firm’s choice between indirect and direct strategies of influencing politics. I argue that businesspeople bid on legislative seats through competitive auctions, whereby they exchange campaign contributions for access to policy and rents. I then derive predictions about how various forms of economic competition increase the value of direct corporate political strategy and undergird a firm’s decision to run for political office.

To test these arguments, I examine variation in businessman politicians in Russia, who on average hold a majority of deputies in 83 regional legislatures from 2004-2012. First, I match each candidate or office-holder to any firms they have owned or managed, thereby identifying politically-connected firms at the legislative level for a dataset of over 100,000 firms. In this preliminary version, I present empirical analysis of the determinants of businessman candidacy, both using this quantitative dataset and interviews with current and former office-holders.

This work contributes to a number of distinct literatures. First, it theorizes exchange between politicians and firms, while incorporating the effects of campaign finance, market competition, and heterogeneity in firm preferences. Next, it builds on the literature of Corporate Political Activity by introducing and examining an understudied strategy available to firms, directly holding political office, as an alternative to lobbying. Lastly, the project speaks to work on incumbent government stability and democratic representation by directly looking at who participates in political institutions and how these institutions are used to distribute rents.



Identity and Integration:
Language Fractionalization and the Vote for the Eurozone in France
Megan TEAGUE and Noel Johnson
George Mason University


This paper investigates the persistent effect of cultural identity on the political equilibrium in the European Union. We do this by examining the relationship between the 1992 referendum on accession into the EU and cultural identity across French regions. Surprisingly, we find that those regions in which citizens tend to self-identify with their local communities, as opposed to identifying with “France” or “Europe”, were also much more likely to vote to join the European Union. We argue that the reasons behind this result are historical. Regions that currently identify with local interests as opposed to national interest tend to do so because of an inherent distrust of the French state caused by long a history of oppression and non-consensual cultural and economic assimilation by the center. In order to better identify the causal effect of identify on the EU vote, we instrument identity using measures of French language use from the 1864 survey of Victoire Duruy. These IV results support our central claim that the tendency for locally minded regions to vote for accession into the EU has deep historical roots based on cultural identity.



Does Firm Ownership Influence Judicial Rulings in China?
An Empirical Study of People's Supreme Court Intellectual Property Cases
Jun Wang and Cheryl Long
Xiamen University


How has China's legal system been functioning during the country's reform era? Based on an empirical examination of intellectual property cases from the Bulletin of the People’s Supreme Court (PSC) and the PSC Intellectual Property Judicial Guidance published since 1986, this study explores whether the ownership type of the plaintiff has significant effects on whether the plaintiff gets a favorable judicial ruling, after fixing the defendant’s identity and controlling for various plaintiff and defendant characteristics.

Specifically, we study the rulings in trials of first instance and in appeals, to examine whether the plaintiff will have a higher probability of winning when it is a firm instead of an individual, a state-owned firm instead of another type of firm or an individual. By doing so, we find there has existed ownership discrimination in China's judicial system during first trials: when the defendant is a state-owned firm, the plaintiff is more likely to win when the plaintiff is a state-owned firm than when the plaintiff is another type of firm or an individual. However, as time goes on, the winning rate has declined. In addition, we have not found similar results in appeals; there has not existed this judicial bias in appeals.



How Valuable is the Right to Lease Land?
Guangliang YANG
Fudan University


Despite the collective ownership of rural land in China, transfers of use rights in agricultural land have been officially granted since the passage of the Rural Land Leasing Law in 2002. Using a unique data set with detailed information on rural land leases and household characteristics, we provide empirical evidence to show significantly higher income levels of rural households that lease in or lease out land, relative to households not involved in land transfers.

Additional results suggest that the availability of land transfer is conducive to production specialization among rural households. Households with an expertise in agricultural activities choose to rent in land and achieve higher agricultural productivity through economies of scale, while households renting out lands are more likely to work in cities or run a business to take advantage of the higher returns to their skills in those sectors. Thus both types of households increase their incomes relative to households without any land transfers.

By allowing a more efficient allocation of resources among individual producers, the right to transfer properties helps achieve higher productivity for the whole society. Our findings provide empirical evidence in support of the theory.



Party Committee, Workers’ Welfare and Firm Performance:
Evidence from Chinese Private Firms
Cheryl Long and Jin YANG
Xiamen University


The Chinese Communist Party (CCP) is increasingly involved in the private economy, which has become one of the most distinct institutional features of the Chinese economy.  In recent years more and more Chinese private firms have established CCP committees in their management structures. By 2008, nearly 40% of private firms in China have set up various forms of party committees. The presence of a Communist Party cell in the firm’ management structure raises a concern whether these grass-roots party committees really protect workers as it claims. Given the CCP’s adapt over time to embrace the private business and private entrepreneurs, many people worry about that these party committees may not represent the interest of workers. The current paper intends to answer the following questions: Does the CCP committee in the private firms promote workers’ welfare? If so, does it hamper firm performance?

Using two waves of a nationwide survey of private firms in 2006 and 2008, which comprises both large firms and individual household enterprises drawn from 31 provinces in mainland China, we empirically study the firm level party committee’s effect on workers’ welfare and firm performance. To overcome potential endogeneity, we employ the regression discontinuity approach based on the rule imposed by the Constitution of the CCP: Primary party committees should be initiated in any basic units with more than 3 full party members. The empirical result shows that party committees in private firms have positive and statistically significant effects on many types of workers’ benefits, e.g., pension, labor and social security insurance, unemployment insurance, injury insurance, individual and collective contract, and income. Once controlled for party committee, we find that union has no effect on workers’ welfare. These findings are robust to a series of alternative specifications that control for the characteristics of entrepreneurs and firms.  Further analysis shows that party committee promotes workers’ labor productivity but has no significant effect on firm profitability.

These findings suggest that Chinese Communist Party still sticks to its ideological basis of protecting the benefits of working class when adapting to the new economic and social environment its reforms are creating.



Income Increase, Perception of Fairness, and Satisfaction with the Government
Lin ZHANG
Unirule Institute of Economics


Using the data of a field survey conducted by Unirule Institute of Economics, this paper focuses on the analysis of the relationships among income, perception of fairness, and satisfaction with the government. During the field survey, there were more than 6,000 copies of valid household questionnaires obtained in 30 capital cities in China; each questionnaire contains more than 70 questions. According to the replies of the questionnaire, one index system was set up to assess the satisfaction of citizens in 30 different cities, another index system set up to quantify the perception of fairness in 30 different cities. The index for satisfaction contains public service, civil rights, and corruption etc. The index for perception of fairness contains education, medical care and security housing etc. Then there is a rank for the satisfaction, a rank for the fairness, and a rank of income level for 30 different cities. It turns out that both the income difference and the perception of fairness relate to satisfaction with the government. But the relationship between the perception of fairness and satisfaction with the government is much stronger. It can help us to understand the function of fairness in a social institution.


 
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