WORKSHOP ON INSTITUTIONAL ANALYSIS
MAY 14-20, 2017
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|Kochanova|Li|C. Lin|W. Lin|
|Rodriguez-Ramirez|Shen|Wei|B. Yang|T. Yang|Yi|
To Work or Not To Work:
Male Earnings and Female Labor Force Participation in India
University of California - Riverside
How does the labor force participation of women respond to their husband’s income? I study this question in the context of India- where despite economic growth, decrease in fertility, and increase in female education, the female labor force participation (FLFP) rate is on the decline. In this paper, I analyze one mechanism that explains this puzzling decline- male household earnings. I use data from 1999-2012 rounds of the National Sample Survey to form a panel of districts in India segregated by skill levels of males. I use this decade long panel to estimate the relationship between married male earnings and labor supply of married females at the regional level. Additionally, I supplement the analysis with Indian Human Development Survey individual panel to estimate the effect of husband’s earnings on wife’s labor supply over time.
My analysis from both sources of variation in male earnings indicates a robust negative effect of married male earnings on the married FLFP rates in India. I do not find any effect of married male earnings on the labor supply of never-married females and find a negative impact of married male household income on labor supply of the elderly and teenagers, which serve as robustness checks. This suggest a strong economic mechanism - income effect- behind the declining FLFP in India. I will examine the heterogeneities in this relationship introduced by relative differences in agricultural production technologies that favor the use of female labor in certain regions over male’s.
Institutional Reforms, Governance Structure, and Technology Adoption:
Evidence from the Indian Electricity Distribution Sector
Humboldt University Berlin
The Indian power sector has undergone major institutional reforms. It resulted in change in governance structure including provision of regulation by an independent electricity regulatory commission. For the distribution sector, a key objective of these reforms was to restrain the huge amount of electricity lost in distribution networks (distribution losses) by adoption of new technology. But a review of the Indian power sector shows that among other factors, increasing distribution losses still continue to be a challenge and bear serious implications for the viability of the entire power sector.
Building on NIE literature and the analytical framework of transaction interdependence cycle (Hagedorn 2008), the study proposes that a new technology changes properties of transactions which in turn change the interaction between actors (often endangering their vested interests), in turn changing transaction costs. With the changes in transaction costs, new transaction-cost-minimizing governance structures are required (Williamson 1985). Thus at the conceptual level, transactions, transaction costs, interaction between the actors and changes in these three elements can explain failure of governance structures in adoption of new technology. Based on the above understanding of interaction between technology and governance structure, we analyse our empirical case where governance structures were changed ex-ante (i.e. reforms of the electricity sector) anticipating that this by itself would follow change of technology. On the contrary, ex-post technology adoption is experiencing a lot of resistance.
Based on theory of transaction cost regulation and regulatory governance (Levy and Spiller 1994), we modeled the technology adoption in distribution network as the interaction between four key actors, namely, consumers, utility, regulators and politicians/government. Using the case study of the Indian state of Andhra Pradesh, we analysed the formal/legal framework for functioning of regulator and its actual implementation. Formal rules require the regulator to enforce distribution loss reduction by adoption of new technologies. But analysis of investment data of four utilities of Andhra Pradesh over a period of six years reveals that the regulator actually reduced investment in new technologies during the regulatory approval, thereby undermining the strength of formal governance structure. The available data set shows that the regulator’s decisions are influenced by politicians. We also found that regulatory incentives are not effective in determining utility’s investment in new technologies. Thus, using the case of the Indian electricity distribution sector, the study attempts to explore and explain the inter-relationship between technology adoption and governance structures.
Helping or Grabbing? The Effect of Local Government Size on Firm Entry
Luming CHEN and Ruochen Dai
Does larger local government size improve or deteriorate business environment? We define local government size as the number of government employees per capita at the county level. Taking advantage of the Bianzhi system in China, we find rigid size of local government might induce those with excessive employees to behave more predatorily, which threatens potential entrants. One percent increase in the local government size will result in 0.3 percent decrease in firm entry growth, and the results are robust to IV strategy. Besides, larger local government size will lead to lower firm scale and productivity.
Furthermore, we test whether the effects come from the strengthened grabbing hand or the weakened helping hand. We find that larger local government size is associated with better public goods provision and higher effective tax rate. Also, the influence on firm entry is only present for private firms but not for SOEs. Therefore, we conclude that larger local government size negatively influences business environment and firm entry through the strengthened grabbing hand.
Renounce the Pen for the Plough:
Decollectivization Reform and Educational Inequality
Jingyuan CUI, Yingjie Feng
China implemented a decollectivization reform in the late 1970s and early 1980s, which established the Household Responsibility System (HRS) in rural areas. Prior to 1978, most Chinese farmers worked together in communes and had no rights in decision-making. The decollectivization reform that began in 1978 revolutionized this system. Households contracted with collectives and promised to meet the quota sales obligation imposed by the government. Then they could sell what they harvested beyond the quota in free markets.
Previous studies show that the HRS reform provided farmers with strong incentives, thus raising agricultural production and standard of living in rural areas instantly. Yet, little research has investigated an unintended outcome of the policy, the adverse impact on educational attainments for rural children. Agricultural reform significantly increased the opportunity cost of schooling for rural children, and holding other factors fixed, we may expect in areas where the HRS reform was implemented the educational attainments of rural children decreased and the urban-rural educational gap for the corresponding cohorts would rise. In addition, since male labor is more valuable in farming, it is plausible that the agricultural reform impacted rural boys more than rural girls, thus reducing the gender gap in education in rural areas.
This paper takes advantage of the time variation in adoption of HRS across counties and investigates its impact on the educational attainment for birth cohorts in 1964-1975. In principle, children born much earlier than the reform would not be affected since they had already made the schooling decisions by the HRS reform. In contrast, for children born later, that is, close to the reform era, their schooling decisions were potentially affected by the reform. Thus, our estimate of the effect of the HRS is based on the comparison of these two groups. The preliminary results in this paper show that rural-urban gap in education widened after the reform, while within the rural areas the gender gap in education narrowed.
Power Struggle, Power Transfer, and Coalition Dynamics
Can we predict the outcome of power struggle? This paper shows power struggle leads organizations almost irreversibly to dictatorships when credible commitment is impossible: I cannot promise not to eliminate you tomorrow, even if you are my ally today. I develop a model where far-sighted rational individuals with disposable power compete to form ruling coalitions. Members may weaken themselves to invite allies or to secure a seat at the table by compensating the deviators.
1. Power in an organization is more centralized to few individuals in power struggles after exogenous shocks on organizational structure.
2. With fixed rents to share, organizational structure irreversibly evolves into dictatorships after sufficiently many shocks.
3. Power struggle can be softened when there is a production technology that requires wide participation. Consequently, the society can be cycling between economic development and resource redistribution.
Vertical Integration and Goodwill: The Case of Real Estate Companies
The University of Hong Kong
Vertical integration refers to purchasing and organizing resources to produce output or intermediate outputs within a firm instead of directly purchasing them from the market. Examination of the annual reports of listed real estate companies in Hong Kong suggests that they have varying degree of involvements in various activities of producing accommodation spaces (real estate assets), ranging from planning and design, real estate development, investment, construction, building materials/components manufacturing, property maintenance and property management. This provides us a good opportunity to examine why companies integrate vertically.
We propose that vertical integration is necessary for companies which have invested in “goodwill”. It is usually impossible for a real estate company to produce high quality buildings using the market, e.g. selecting an outside construction contractor using the tendering process. (High quality buildings refer to buildings with relatively fewer latent defects years after occupation. Latent defects are defects due to poor workmanship or use of substandard materials that are difficult or impossible to discover during the defect liability period. Usually first year after occupation real estate companies are not liable for any latent defects.) Since, by definition, the latent defects cannot be detected easily, the transaction cost of procuring such buildings or its components become prohibitively high. Careful direct supervision of workers and direct purchase of materials are essential to producing high quality buildings and hence vertical integration. Not all real estate companies have successfully created a good reputation of delivering high quality buildings. For those that are successful, the higher building qualities are reflected in higher transaction prices in second-hand market.
For the empirical tests, this study will make use of second-hand housing transaction data in Hong Kong (predominantly high-rise buildings) to estimate a Goodwill Index (which is the average difference in the second-hand transaction price of a standardized unit developed by different real estate companies. The estimated Goodwill Index should be positively correlated with the degree of vertical integration (measured by the number of building production actives involved), holding other factors constant.
Government-Encouraged Denunciation and Trust:
Evidence from China's One Child Policy
Yi HAN, Yiming Liu
University of Pittsburgh
Authoritarian governments frequently encourage citizens to denounce their neighbors, friends and co-workers. For example, during Stalin’s Great Purge, people were often sent to the Gulag as a result of reports initiated by friends and neighbors (Fitzpatick, 2000). Similarly, in Nazi Germany housewives, dentists, and other average citizens turned in their Jewish neighbors after petty neighborhood quarrels (Johnson, 2000). Despite the prevalence of the “turning people into spies” strategy, little is known about its impact. Historians have long hypothesized that government-encouraged denunciation causes distrust (Fitzpatrick, 2000), but there is no empirical test so far for this view. In this paper, we are going to fill in this gap.
The implementation of One Child Policy (OCP) in China provides us with a good opportunity to study the causal effect of government-encouraged denunciation on trust. During the enforcement of OCP in China, the government encourages its citizens to report unauthorized births of other citizens and provides awards for denouncers. Using survey data from China Family Panel Study (2010, 2012), we construct an individual level measure of exposure to OCP. In line with our hypothesis, the results show that people exposed more severely to OCP exhibit significantly lower trust towards neighbors, but their trust in parents and strangers is not affected.
Surprisingly, the exposure to OCP does not significantly lower people’s trust in local governments. We propose a blame shifting theory based explanation of this finding and show that part of the blame is shifted from the government to the denouncers. A small but growing experimental literature shed lights on the effectiveness of blame shifting strategies in the lab (for example, Bartling and Fischbacher, 2011). We contribute to the blame shifting literature by providing the first empirical evidence supporting the theory.
Local GDP manipulation in China
This paper provides systematic evidence that local GDP data in China, which affect promotion of officials, are subject to severe manipulation during 2000-2013. First, the national GDP growth estimated using provincial numbers is always higher than that from the central government. The average gap is 1.6 percentage points. It is difficult to explain the gaps with accounting errors by provincial governments such as double counting and undercounting of GDP. Second, the distribution of prefectural GDP level does not comply with Benford’s law. There are too few 9s for both the first (leftmost) and the second digit. Local governments may create this unusual pattern to meet some threshold. Third, we look at the last (rightmost) digit of prefectural GDP growth rates, which should be distributed evenly among 0-9. However, there are more 0s, 1s and 2s than 7s, 8s and 9s. This can be driven by local officials’ desire to exceed an integer number. In contrast, for growth rates of the primary, secondary, and tertiary sector, which are less important for officials’ promotion, the uneven distribution of the last digit attenuates. Fourth, when the provincial government emphasizes more on economic development, prefectural governments tend to report higher GDP growth rates, conditional on nighttime light growth and per capita GDP. This pattern is more pronounced for prefectures far away from the provincial capital, for which the provincial leaders have less unofficial information and have to rely more on reported statistics.
Does Pollution Permit Trading Make a Difference?
American University in Bulgaria
The pollution permit trading scheme is a widely used market mechanism to reduce pollution. In the US, there is a large market for SO2 permits, while in Europe – for CO2 permits. The idea is that buying the permits will make the companies pay for their pollution. That is based on the “polluter pays” principle. It is implied from the Coase theorem.
It will be particularly interesting to observe how prices and pollution permit trading affect individual firm behavior. In particular, how they affect firm decision-making, profitability, investment decisions, emissions, etc. Using firm-level data, this study attempts to do that. The European Union Emissions Trading System (EU ETS) provides a rich environment to test theories about efficiency of emissions trading. While Jaraite and Maria (2016) argue transferability of their results to firms in other countries, still studying other countries may be more revealing. They note the scarce empirical literature on the issue.
Using a panel dataset from several countries spanning several years I study how permit trading reduces pollution at the firm level. The EU has the most comprehensive CO2 pollution permit scheme, so if CO2 permit prices work anywhere, it will be in Europe. I examine empirically whether permit trading positively or negatively influences firm’s profitability and competitiveness. The answer to that question may be critical to policy makers and firms. If firms are shown to lose competitive advantage with permit trading, that is not good news to them. If, however, permit trading makes them more competitive, that will stimulate the use of ETS. Yu (2011) has used Swedish data to investigate the effects of participating in ETS on the profitability of firms. They discover a significant negative effect in 2006.
The data include: participation in EU ETS, fuel purchases, turnover, capital stock, profits, estimate of CO2 emissions, industry. We study the differences between companies that participles in EU ETS and ones that do not. Another worthy question is whether participating in ETS gives incentive for investments in cleaner energy sources. We examine the impact of ETS on firm’s profitability, on firm’s investment in cleaner capital, on emissions.
Minds for the Market: Non-Cognitive Skills in Post-Soviet Countries
Anna KOCHANOVA and Maryam Naghsh Nejad
Max Planck Institute for Research on Collective Goods
Can economic and socio-political institutions shape non-cognitive skills of individuals? The recent research finds that non-cognitive skills (or personality traits, soft skills) are important driver of educational and labor market success of people. In turn, institutions play significant role for economic growth and development and determine social preferences of people. An affirmative answer to our question, therefore, would highlight a channel through which institutions impact economic development. It would also help to explain why institutional change in a country may take a long time to create economic differences, given that personality traits of adults tend to be stable over age.
To examine the relationship between institutions and non-cognitive skills, we make use of dramatic institutional differences between the communist era and the transition period after the breakdown of the Soviet Union. The Communist Party regime of the USSR controlled the entire economy and society. Its collapse was sudden and unpredictable. Everything, from livelihoods and day-to-day life to social, market and political organization, changed in a very short period of time. While loyalty to the bureaucracy of the Communist Party and conformism was the key to achieving success in the command economy other skills became needed to succeed in the new, though imperfect, market-driven world. Post-Soviet countries, therefore, provide a unique arena to study the consequences of institutional change.
We focus on three post-Soviet countries, Armenia, Georgia and Ukraine, and compare personality traits of individuals that were born much before the collapse of the Soviet Union with those that were born shortly before or later, relative to individuals from the other developing countries that had never gone through the same institutional changes. Our preliminary findings show that the scores of extraversion, openness and grit of the older Soviet generation are significantly lower than those of the younger generation. The analysis using birth cohorts also shows that the longer individuals lived in the communist regime the lower their non-cognitive skills scores.
Our paper contributes to the literature on the role of institutions, non-cognitive skills formation and general understanding of post-soviet societies.
How Wide Is the Firm Border?
Enghin Atalay, Ali Hortaçsu, Mary Jialin LI, Chad Syverson
University of Chicago
We quantify the transaction costs that firms face when participating in intermediate goods markets. To do so, we examine the shipment behavior of tens of thousands of establishments that produce and distribute a variety of products throughout the goods-producing sector. Our main analysis relates the frequency of shipments across pairs of sending establishments and destination zip codes to the proportion of establishments in the destination which share ownership with the sender. These regressions reveal that the firm boundary is notably wide: An additional downstream establishment which shares ownership with the sender has an equivalent effect on trade intensity as a 30 percent reduction in distance between sender and destination. A calibration of a multisector general equilibrium trade model demonstrates that these transaction costs also have discernable economy-wide implications.
GuanXi Culture and Firm Innovations in China
The existing literature has stressed that informal institutions like GuanXi have played positive roles in the development of the Chinese economy, acting as alternative governance mechanisms when formal legal and financial systems are underdeveloped. This paper argues that the GuanXi culture may have the negative side effect of deterring firm innovations by substituting for technological criteria, distorting the allocation of entrepreneurial efforts and resources, and affecting hiring decisions within firms.
To empirically test these predictions, I construct a unique cross-sectional dataset of GuanXi culture in 96 Chinese prefectural cities using the CHIP survey data, and match it with the Chinese Industrial Enterprise Database and a manually-collected firm-patent dataset. The results show that GuanXi is negatively and mostly significantly associated with a wide array of innovation indicators including R&D expenditures, new product outputs, and the applications and approvals of patents. And the impact is stronger on inventions among the three types of patents.
Furthermore, by defining innovative efficiency as the conversion of lagged R&D expenditures into new product outputs, and invention applications into approvals, I also discover different influencing mechanisms of the GuanXi culture on firms of different ownership types. While GuanXi significantly reduces innovative inputs and thus outputs of private firms and foreign-invested firms, it does not affect innovative efficiency for these firms. In contrast, GuanXi significantly lowers innovative efficiency for state-owned enterprises but does not significantly constrain their innovative inputs.
Finally, to tackle the potential endogeneity of GuanXi, I use prefectural-level averages of “frequencies of festival greetings” and “numbers of siblings”, as well as provincial-level averages of “frequencies of honoring ancestors” as instrumental variables, and largely confirm the robustness of the above findings.
Informal Land Property Right in China:
A Case Study of the Incomplete-Property-Right Houses
Wanlin LIN and Emily Skarbek
King’s College London
Legally, the urban lands in China are owned by the state, and the rural lands are owned by the rural collectives. In rural areas, although the village committees allocate their villagers certain amounts of housing plots-lands for self-living, the lands are not allowed to be exchanged outsides the villages. However, in reality, in the peri-urban areas with high demand for land, lots of houses or apartments are built by villagers or village committees, and rent or sold to people outside the villages. They are termed as “Incomplete-property-right Houses”, implying their property right is not acknowledged by the statute. But their emergence and prevalence have challenged the formal land property right and government authorities. Thus, empirical and theoretical exploration are needed to figure out 1) how the interaction of involved actors, namely, the villagers, village committees, central and local governments, and developers, leads to the emergence and prevalence of the incomplete-property-right houses;2) how institutional elements, particularly the rules, actors’ belief and knowledge play roles in the operation of the incomplete-property-right house market; and 3) how the formal and informal institutions interact.
To solve these puzzles, we establish an institutional analysis and development framework which is significantly inspired by Ostrom’s opinions about the multiple levels of rules and institutional analysis. We firstly examine how the exogenous rules, namely, formal land institutions and relationship between central and local governments, and actor’s endogenous belief and knowledge jointly result into the emergence of the incomplete-property-right houses. Secondly, by viewing the action arena as the analytical core and adopting the game theoretical model, we explore the specific interplay of the involved actors in incomplete-property-right house market in three places in China, i.e., Hainan, Shenzhen and Beijing. It is found that though under the same legal system stipulating the state/collective land ownership, the actors, especially the local governments might have different incentive structures. Briefly, we may find that the enforcement of the land property rights is characterized by the polycentricity and it is essential to figure out the effects of the specific institutional elements if we want to understand how they operate.
How English Proficiency Affects Income:
Occupational Language Exclusion in Hong Kong
Hong Kong University of Science and Technology
Hong Kong is a bilingual society where both Chinese and English are official languages. The majority of Hongkongers speak Chinese (Cantonese) at work and home; comparatively, only half of persons acquire English skill. This study examines economic returns to English and investigates how English proficiency affects income. Using data from Hong Kong Panel Study of Social Dynamics (HKPSSD) first wave, we find that individuals with higher English proficiency are more likely to become managers and professionals and have higher SES. Meanwhile, persons acquiring higher English proficiency earn more than those with lower English proficiency. Controlling for other factors, the average monthly income of individuals whose English is very proficient is 30% higher than that of persons whose English is not proficient at all. More importantly, occupational language exclusion, measured by the percentage of people acquiring English skill within each occupation, explains the premium for English proficiency. Decomposition results show that between-occupation differentials are the majority of earnings differentials between Hongkongers with English skill and those without English skill, which confirms the key role of occupational language exclusion. Furthermore, we have a special focus on how English proficiency affects gender earnings gap. Premium for English proficiency is higher among females than that among males. On the other hand, occupational language exclusion is stronger for females. The gender earnings gap diminishes as the increase of English proficiency. This paper sheds new light on earnings returns to language skill.
Economic Reform in a Sectarian-Political Regime: The Case of Electricity in Lebanon
University of Balamand
Lebanon suffers from an average of 12 hours daily blackout and the government losses due to managing the sector represent around 50% of the nation’s fiscal deficit. A black market of electricity emerged where small private generators supply a backup solution for a very expensive subscription fee. Special interests exist in the pubic electricity company (called EDL) which makes its privatization impossible. However, the 12h blackout provides an opportunity to go around the system. A double reform - repealing electricity subsidy and opening the sector to competition - would allow the private sector to fill the energy gap without privatizing EDL. The reform will address both the blackout problem and the government financial losses. The public electricity bill would increase, but the private bill will decrease, making the overall electricity cost lower for consumers. This solution increases the well-being of consumers without reducing the benefits of other actors. Yet, decision makers will not pass the reform unless it actually benefits them because the sectarian nature of political parties ensures the full allegiance of their voters regardless of the policies they adopt.
From Manufacturing to Land Financing: China’s New Growth Model?
Jiawei MO and Shiyuan Chen
The University of Hong Kong
This paper presents the first county-level evidence of China's transition from manufacturing oriented growth to land-financing-government-investment growth after the “Four Trillion Yuan” policy introduced in late 2008. Based on firm-level manufacturing data and transaction-level land leasing data, we study different performances of two types of counties from 2005 to 2014: one relied more on land financing vs. one focused more on manufacturing. We use land dependency, average elevation and fiscal deficit to proxy for the land financing strategy, and employ manufacturing total factor productivity (TFP), TFP growth and intermediate input to proxy for manufacturing-oriented strategy.
The empirical findings suggest that GDP growth rate of manufacturing-oriented counties dropped by 3.5 percentage points on average after 2009 compared with other counties, while counties more reliant on land financing increased by 1.8 percentage points during the transition. The growth rate of fixed asset investment, fiscal revenue and ratio of average bank loans over savings in land-financing counties increased by 7, 8 and 4.45 percentage points respectively after 2009, while manufacturing-oriented counties experienced no significant change. These results are not driven by the effect of county size. The results are robust when using satellite data of night light as a proxy for economic growth. We argue that a land-financing-government-investment model is a special means of reallocating financial resources towards urban construction through land supply.
Common Property Resources, Property Rights and Natural Disasters
University of California – Santa Barbara
Property rights are the foundation of institutions that shape economic decisions ranging from individual transactions to the performance of a country’s economy. The incentives generated by the institutions in place also translate into measures of vulnerability and recovery in the face of natural disasters. Using the example of Chilean fisheries and the tsunami that affected the country in 2010, I measure how those incentives translate into production decisions before and after the natural disaster under different property right regimes. I find significant evidence that weak property rights over the resource lead to economic inefficiencies. These results contribute to the ongoing discussion of the role of property rights in the economic performance of common property resources, and how productive sectors and countries are affected by and recover from natural disasters.
Do Social Programs Lead to Higher Income for Self-Employed Workers?
Assessing Public Policies and Labor Market Segmentation in Nicaragua
Rony Rodrigo Maximiliano RODRÍGUEZ RAMÍREZ
KDI School of Public Policy and Management
Do social programs lead to higher income for self-employed workers? In many Latin American countries, governments have been implementing a diverse set of social programs to improve the living standards of the target groups. However, the empirical evidence is mixed. I study the policy shift of the current government of Nicaragua that started in 2012 towards the self-employed workers. Recently in Nicaragua, with the National Human Development Plan (2012-2016), the family economy became an explicit focus of Nicaragua’s public policies. These public policies have meant a transition from a development paradigm with policies targeting big businesses’ development, to a more inclusive paradigm with government programs for self-employed workers.
This paper aims to (1) quantify the impact of these programs on the income of self-employed workers in the manufacturing industry, hotels, and restaurants, and (2) estimate whether these programs have created incentives for the self-employed workers to formalize their work. In order to achieve these objectives, I use secondary data from the Living Standards Measurement Survey implemented by the National Institute of Development Information of Nicaragua. The data consist of 3 waves: 2005, 2009, and 2014. The main identification strategy is a Differences-in-Differences estimation using a Propensity Score Matching to reduce the selection bias, given that participants of the government’s programs differ in characteristics from non-participants. Additionally, I implement a Quantile Differences-in-Differences estimation to see the impact of the programs in the lowest quantiles.
The findings reveal that the efforts to expand the policy transition towards the self-employed workers are positive. For instance, the program’s impact has been positive for self-employed female workers, and especially for those females at the 0.25 quantile. Nonetheless, there is no evidence of the program’s impact on males or on the incentives to formalize their work. In this sense, the current government’s programs have positively affected one side of workers’ living standards. However, the channel of transmission and the general equilibrium of these programs remain for further research.
Keywords: Self-employment, informality, social programs, impact assessment, Nicaragua.
The Pricing of Housing without Legal Title
The University of Hong Kong
Informal housing are housing units without legal title. Despite the lack of legal title, there is a huge black market for informal housing. While legal title is the most effective means of protecting owner's rights over their properties, there are other means of ensuring certain degrees of tenure security that allows the allocation of informal housing units using the price mechanism. We propose that private property rights is not a discrete concept but a continuum that relies on people's confidence in the institutions that enforce these rights. The legal system gives people the highest level of confidence due to the involvement of the government. However, the legal system is not the only institution that can give owner confidence. Since high confidence can lead to more efficient resource allocations, in the absence of legal titles, other institutions such as culture, social norms, violence etc., will emerge to boost people's confidence. If the emerged institutions allow the use of the price mechanism, we can observe how the assets without legal titles are priced. Assets without legal title should be transacted at a discount (assuming the legal title gives asset owners the highest level of confidence ) to those with legal title. This discount is analogous to rent dissipation in the case of communal properties where institutions are emerged to minimize rent dissipation. The choice of institutions will depend on its transaction cost (defined in the broadest sense according to Steven Cheung, i.e., costs that cannot be envisaged in a Robinson Crusoe economy ). Suppose there is a negative relationship between the transaction cost of the emerged institution and dissipated rent. The "equilibrium institution" is the one with transaction cost equal to the dissipated rent. Therefore the observed discount is a measure of the transaction costs of different institutions. In the China informal housing market, we have a large volume of data for estimating the discount. One contribution of this study is to measure empirically the transaction costs of different non-legal institutions emerged to give confidence to asset owners. In addition, this study also examines the factors that affect the transaction costs of different non-legal institutions.
Performance Versus Connections: The Fiscal Foundation of Bureaucratic
Power Sharing in the Late Qing China, 1860-1910.
Jinlin WEI, Tianyang Xi
A fundamental paradox faced by authoritarian rulers is that the reforms that are considered necessary for maintaining regime resilience, such as decentralization and power sharing, often undermine the effectiveness of the direct control of rulers over state bureaucrats and thus pose a threat to the political survival of ruling groups. In turn, the literatures of political economy have identified various theoretical channels by which rulers place loyalty above competence in political selection (Acemoglu, Egorov, and Sonin, 2010; Egorov and Sonin, 2011). Echoing these arguments, the empirical literatures based on the context of contemporary China attest to the interactive roles of loyalty and competence, or performance versus connections, with competing findings showing the importance of bureaucratic performance and political connections in driving the career success of government officials (Li and Zhou, 2005; Jia, Kudamatsu, and Seim, 2014; Shih, Adolph, and Liu, 2012).
This paper empirically examines how fiscal performance and political connections matter for bureaucratic selections in the imperial China during the late Qing period, utilizing a unique data set covering the career paths of over 800 high ranking bureaucrats. The outbreak of mass Taiping Rebellions in the 1850s posed a severe challenge to the state capacity of Qing, forcing the rulers to delegate the power to levy Lijin, the commodity tax being collected at regional customs, to provincial governments. Along with the expansion of markets in the late 19th century, lijin became increasingly important as a source of fiscal revenues for the state, amounting to nearly 50 percent of the annual income. The paper documents complementary effects of fiscal performance and political connections in determining the promotion of bureaucrats. Specifically, the probabilities of promotion for governors and lieutenant governors were both positively related to the amount of Lijin revenue, so were political connections to power factions in the central government. Moreover, the Lijin revenue enhanced the power of governors-general, increasing the probability of promotion for lower level bureaucrats with connections to the governors-general. The results are robust to the inclusion of internal and external military conflicts. The long-term impacts of fiscal decentralization on regime stability are also investigated.
Decline of Xiayi: State Building and Revenge in Pre-Modern China,
211 BC - 1911 AD
Shuo Chen, Bo YANG
State building has been attracting more and more attention by economists in the past decades. The existing literature mainly emphasizes the state capabilities to collect taxes and enforce contracts, while few researchers explore the role of another important dimension of state capacity: social control. This paper focuses on the state’s control on social norms and examines whether and how the state has influence on it.
We study the evolution of a Chinese long-standing social norm, Xiayi, which is characterized by taking revenge for one’s relatives, friends and even strangers by private force. Based on rich historical documents, we trace and identify hundreds of revenge cases over the last two thousand years. Regression results from autoregressive distributed lag (ARDL) models exhibit clear evidence that strong state capacity, measured by state’s various managerial institutions on salt supply (e.g. taxation or monopoly), did have a negative impact on revenge prevalence.
This finding may be explained by two state strategies: either suppress revenge by making it illegal in laws, or undermine it by providing more judicial public goods. To test the potential mechanisms, we classify the attitudes towards revenge in laws of each dynasty and use the rank of the top central officials in charge of judgment as a proxy for judicial public goods supply. The results suggest that prohibition by laws cannot work and may even backfire; however, by providing more judicial public goods, the state can effectively reduce the revenge rate. To our knowledge, this is the first paper which empirically tests the impact of state capacity on social norms in a long-lasting civilization and it offers much historical experience on building state capacity to many modern countries.
Institutional Innovation in the Housing Rental Market to Reduce Transaction Cost
The University of Hong Kong
Although there is a huge demand for housing rental units, the housing rental market in China suffers from serious information asymmetry. Prospective tenants know very little about the quality of units and the maintenance services provided by the landlords. Tenants' rights are also not effectively protected by the government. Early terminations of rental contracts by landlords are common, especially when rents are increasing rapidly. Information asymmetry results in high transaction cost in the housing rental market.
In recent years, a new form of institutions emerged to reduce transaction cost – the institutional landlord (IL). An IL is a housing unit leaseholder who rents units from many individual housing unit owners for 1-5 years and will then rent out these units (with or without improvements) to renters with 1-3 year contracts. The IL will also provide maintenance services. These ILs are in fact real estate agents who experimented with this arrangement a few years ago as they understand the information asymmetry problem, which inhibits many transactions. Since these are big and well-known real estate agents who care about their reputation, renters are confident that they will not provide bad services or act opportunistically during the rental period. Therefore, renters are willing to pay a premium to rent units from IL.
Data from two real estate agents in Beijing who also act as IL comprise both rental data for units rented out by IL and by private owners. The rent premium of IL units over private owners’ units, after being adjusted for other factors such as lease period, improvement, self-promotion bias and housing features, partially represents the recovery of some of the high transaction cost due to information asymmetry.
What is the Value of Intellectual Property Protection in China?
How to quantify the value of intellectual property right (IPR) protection in China? In this paper, we attempt to evaluate the value of IPR protection through investigating the change of listed firms’ performance under different degree of IPR protection in China. First, we apply the model developed by Griliches (1984) to estimate the impact of the patents on firm value, using panel data on Chinese listed companies for 1990-2015. Second, we explore the difference between patents’ value, which under different degree of IPR protection environment, the gap of patents’ value reflects the value of IPR protection.
The three indexes we adopted to measure the degree of IPR protection include a policy of subsidy for patent insurance, the costs of contract enforcement, and the win rate of patent infringement cases. The empirical results suggest that the higher the degree of IPR protection, the higher the value of patents. The higher the quality of the patent, the more likely it is to be affected by the degree of IPR protection. Based on these findings, we estimate that the value of a patent is about 2.55 million RMB, and the value of IPR protection for a city is about 332 million RMB in China.
China's Outward Direct Investment: Escape from Institutional Deficiency?
Cheryl Long, Xiangwei ZHANG
As the largest developing country in the world, China has seen an astonishing increase in its outward FDI flow in the past decade. In 2015, China’s outward FDI reached 9.9 percent of the world’s total FDI flow, making it the second largest source country of FDI outflow globally. While a wide range of factors have been offered as the motivations for Chinese firms' "going out" strategies, few studies explore OFDI as a possible way for firms to escape institutional deficiencies.
Using surveys of Chinese private firms conducted in 2006, 2008 and 2010, aided by measures from the World Bank enterprise surveys, we investigate the relationship between the regulatory environment of a firm’s home region and its OFDI decision, with the focus on whether high tax burden and poor property rights protection are important motivations for Chinese firms to pursue OFDI. Specifically, we find that firms with higher tax burdens tend to engage more in outward foreign direct investment, while firms more satisfied with court outcomes in business dispute resolution are less likely to pursue OFDI projects.
These results show that institutional quality plays a very important role in explaining China's OFDI flow. In other words, the growing volume of OFDI may be evidence for the weakness of domestic institutions rather than an indicator of the strength of the Chinese economy.
Underreporting of Corruption Scandals in Local Newspapers
Paris School of Economics
How does intragovernmental conflict affect media censorship in China? This paper illustrates empirically how local governments in China control the content of newspapers in their jurisdiction when it is in their, but not necessarily the central government’s, best interest. Due to the Chinese central leadership’s desire to publicise its ongoing anti-corruption campaign, I am able to construct a unique dataset of close to 48,000 articles about over 400 allegedly corrupt officials from a range of different Chinese newspapers. When a corruption scandal involving a lower level local official breaks, local newspapers from the same province increase reporting more than newspapers from other provinces. However, the opposite pattern holds when it comes to high ranking officials. This effect is entirely driven by newspapers that are directly owned by their local governments. Furthermore, this pattern is most pronounced in provinces that are furthest from Beijing and those where neither Xi Jinping nor Wang Qishan (the head of the anti-corruption campaign) have worked in their career. Not only are fewer articles about scandals involving high-level officials published in newspapers from the same province, but the ones that are published also tend to be shorter, placed further towards the back of the newspaper and feature less attention-grabbing headlines. These findings suggest that local governments control negative coverage by the local media, at times in contrast to the central government’s wishes. By documenting differential media censorship by different parts of the government hierarchy, this paper presents rare empirical evidence on conflicts of interest within an autocratic regime.
Tax Amnesty Policy and Moral Hazard
University of Belgrade
Maintenance of fiscal sustainability presents a constant challenge for the governments around the globe and has become increasingly important after the outbreak of the financial crisis. Tax amnesty programs, which were practiced rather frequently at the turn of the twenty-first century, have, since the outbreak of the crisis, been considered as a tool capable to remedy fiscal deficits of the countries in distress. However, the gains realized through tax amnesty programs are usually considered to be short-term and outweighed by the costs of enacting such programs. The most significant cost is seen in the decrease of future tax compliance. The decrease in tax compliance is believed to be a result of the loss of the tax authorities’ credibility and taxpayers’ expectations for an amnesty to be repeated.
This paper focuses on the problem of moral hazard caused by the application of tax amnesty programs. Due to the fact that taxpayers expect their tax debts or penalties to be waived or mitigated, there are incentives for them to behave non-compliantly. This paper analyses causal relationship between specific features of different tax amnesties and their influence on taxpayers’ compliance. The author’s intention is to show which features make a specific tax amnesty (un)successful from the point of view of long-term revenue effect, i.e. what makes some tax amnesties more prone to moral hazard than others. Research will be based on the most significant tax amnesties enacted since the mid 1980s. The resulting conclusion will provide policymakers with insights they should take into account in designing tax amnesty policy.