2008 Singapore Workshop: Abstracts

JANUARY 5–10, 2008


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Regulatory Commons Problem of Brownfields Redevelopment in China:
A Framework of Institutional Analysis
Dong AI and Sheng-ji Luan
China Agricultural University

Brownfields are abandoned, idled, or under-used industrial and commercial facilities where expansion or redevelopment is complicated by real or perceived environmental contamination. They have broader environmental impacts than on individual sites. Because environmental impacts and benefits can be seen as the shared resources of an urban commons, institutions that protect this commons can be seen as common property institutions. Thus the commons framework is very useful to analyze the dimensions of brownfields redevelopment at different levels such as neighborhood, urban, and area-wide contexts, especially on so-called "regulatory commons problem".

Nowadays China has a high urbanization rate with a marked inclination of heavy industrialization. A lot of brownfields sites in urban and rural-urban fringe are redeveloped to meet the need for buildable lands. By our preliminary research, there are several models of redeveloping brownfields at different levels in China. Though some environmental regulations have been formalized, environmental risks and liabilities of brownfields are usually ignored by government officers, planners, lenders, developers, even housing buyers. Such fragmented political-legal structures cause regulatory omissions and failures, or regulatory commons problem, and remains gaps in regulation.

We will examine the legal structure and policy issues of brownfields redevelopment in China with institutional analysis. Firstly, we will make a comparative institutional analysis on brownfields redevelopment between China and some other countries, and identify the regulatory commons problem. Secondly, we will analyze the appropriateness of institutional arrangements on brownfields, and discuss the distribution of the private and public costs and benefits of different redevelopment models in China. Thirdly, we will suggest ways to bridge gaps in brownfields redevelopment regulation, which are dependent on the statutory and policy framework of environmental liability and the perception of the costs of environmental risks.

Court Decentralization and Women's Wellbeing
Group for the Analysis of Development (GRADE)

The objective of the study is to evaluate if increasing access to justice has positive effects on women's wellbeing. The impact evaluation of a program to decentralize courts in Peru (MBJ program) will be pursued. The MBJ program installed 43 new courts in poor localities of Peru where judicial services were not available. Campaigns were carried out among courts' personnel to make them sensitive to the unequal situation of women in the communities. The specific objective of the study is to measure quantitatively the impact of this program on: marital status, economic transfers after divorce, alimony, domestic and non-domestic violence, and indicators of intrahousehold decision-making.

A quasi experimental set up will be designed taking advantage of the following situation: because of a cut in the budget for the MBJ program, out of 83 planned courts only 43 were constructed. This situation provides a treatment group (43 localities with new courts) and an intent-to-treatment group (40 localities where courts were planned). The initial 83 localities were chosen on the basis of poverty levels and needs, and are similar among them. Conditional on being among the initial 83 localities there is no reason to explain the selection of the 43 finally treated localities.

Two data sets will be used. One is based upon the National Household Survey (Enaho) and contains information on marital status and transfers after divorce. Enaho was applied in 35 of the 43 treated localities and on the 40 intended-to-treat localities. The second uses the Demographic and Health Survey (Endes), specialized on women's health.  Endes has information on violence, sexual assault, access to police offices, criminal events and decision-making in the family.  Endes was applied in 27 treated localities and in 30 intended-to-treat localities.

Propensity score matching will be used to select comparable localities according to pre-treatment characteristics. Individuals from the matched localities will be the subjects of study. The treatment variable will be whether an individual lives in a locality where a court was constructed. The effects on the aforementioned outcomes will be assessed using regression analysis on the matched sample.

Determining the Social Costs of Overseas Filipino Workers' Remittances: 
A Need for Better Regulation and Institutional Arrangements
Alvin P. ANG
University of Santo Tomas

This paper considers the present issues surrounding the role of workers' remittances and its contribution and effect on economic growth, development and on the changing cultural landscape.  In particular, this paper focuses on how remittances have altered the social, moral and ethical conditions of a country.  We here consider the Philippines as a case study. It is one of the countries in the world with a long history of sending workers abroad.  Last year, the Philippines received approximately US$12Bn of remittances, almost 10% of its GDP.  It ranks as the third largest recipient of remittances in the world after India and Mexico.  It has now become the largest source of foreign exchange and has become the underlying strength of the Philippine economy.

Notwithstanding these gains, the remittances have been observed to have altered the social, political and cultural landscape of the Philippines.  Along this line, this paper attempts to develop a framework to look into the costs side of this phenomenon and to estimate how the benefits and costs accrue to the Philippine society as a whole.  Specifically, the study would attempt to aggregate the costs to society in the form of role reversals, broken families, legal separation, juvenile crimes, rise in drug use, and school dropout rate.  Anecdotal evidence shows that these social issues are rising mainly in areas where there are concentrations of families of overseas Filipino workers.  Thus, by linking these social issues and remittances, we will be able properly account for their true costs to society.

Similarly, benchmarking these costs could help clarify the need for better regulation considering that the Philippines does not have an official policy of sending workers abroad.  Furthermore, an exposition of these costs will help identify appropriate institutions in lowering societal costs and ensuring the maintenance of societal benefits.

Comparative Constitutional History of Latin American and
East Asian Countries
Institute of Developing Economies

The fields of law and economics have been growing and have become more interlinked with continuous interest from researchers around the world due to their impact on several other areas, like developing economics. Both qualitative and quantitative analyses are now being used extensively to help explaining the complex process of development.

On a global scale, there are some good examples of "successful countries" and other equally good examples of "failed countries." East Asia is becoming a paradigm of rapid positive change, while Latin America has been stagnating and even going backwards in some specific areas.

The overall objetive of the study is to try to follow an interdisciplinary approach in order to compare the impact of institutions in the long-term development of several Latin American and East Asian countries. The analysis is mostly based on the constitutional history of the different countries being compared, for example:

How many constitutions has each country had?

How many articles does each constitution have?

How many amendments does each constitution have?

When was the first constitution for the country written?

When was the last constitution for the country written?

How stable has each constitution been?

How secure are the rule of law and the general stability of legal institutions?

What comparative impact have had the Roman (Napoleonic or Continental) codes versus the British legal systems?

Comparisons between the different constitutions in several regions can give new insight into the constitutional history of independent countries, in particular, and of the world, in general.

Since the first constitutions were written in the USA and Poland near the end of the 18th century, there has been a constitutional frenzy in some areas of the world, led by Latin America with 32 constitutions just in the Dominican Republic, 26 in Venezuela, and 24 in Haiti. On the other hand, for example, the United Kingdom, New Zealand and Hong Kong have no constitutions. This might be partially correlated to the differences between the Roman and the British legal traditions.

Much can be learned from the constitutional history and the legal institutions in a comparative analysis around the world.

Incentive Contracts in a Mixed Duopoly: An Experimental Study
Ninghua DU, Shanghai University of Finance and Economics
Guangliang Ye, Southwestern University of Finance and Economics

The previous literature shows that if a public firm is instructed to maximize social welfare, then the public firm moves the market outcome towards the social optimum and the government can avoid direct regulation costs (Beato and Mas-Colell 1984). Industries characterized by imperfect competition among private and public firms are called mixed oligopolies.

In this experiment, we study incentive contracts in a mixed duopoly. There are two firms producing homogeneous products. One firm is private while the other is public. The private owner's goal is to maximize her profit; the public owner maximizes the social welfare. Owners can choose among different incentive contracts that determine their managers' salaries. The public manager's contract is based on a linear combination of profit and the social welfare; the private manager's contract is a combination of profit and sales revenue. Managers make the production decisions upon their incentive contracts. By comparing the experimental results to the social optimal allocation, we empirically test the hypothesis that a public firm can be used as a possible alternative to market regulation.

On Implementing Institutions: De Soto and Yunus Compared
University of Cambridge

Development discourses have focused on a wide range of factors that impact the development process but very little attention has been paid to the role of law and legal institutions in the literature. It is this gap that the paper will seek to address. Douglas North's seminal work has established the importance of certain kinds of institutional structures for stimulating economic growth but leaves the question of how those structures came to be and, even more importantly, how to go about setting them in place open. What lessons are developing nations to learn, then, from the growth experience of the West? Is it only formal legal institutions that can facilitate the reduced transaction costs and resultant high economies of scale that allowed the growth rates experienced in the Western world? On the one hand, the theory would suggest so. But on the other, the real-world experience of a majority of developing States shows evidence of deep-rooted problems in effectively entrenching Western-type formal legal institutions. What is the way forward? The paper will explore this broader question through the conflicting institutional models provided by Hernando de Soto's Institute for Liberty and Democracy at one end of the spectrum and that of Muhammad Yunus' Grameen Bank on the other. De Soto's prescription, taking the cue from the theory, advocates the setting up of formal property rights as the 'way in' for the poor into capitalism by facilitating access to credit. Yunus' Grameen model, by stark contrast, completely circumvents the traditional preoccupation with formal legal mechanisms in the credit market and sets up an extremely effective institutional structure providing loans to the poor that builds on local norms and networks of trust. These alternative ways of structuring the interface between formal institutions and informal norms – one integrating the informal into the formal, the other building the macro structures from existent micro networks – represent the two options available at the crossroads of current development policy. The paper, by conducting a systematic comparison between the two, will take a crucial step towards taking the momentum generated by institutional economics and the recognition that institutional analysis is a key component missing in development theory forward.

The Transition from Relational to Legal Contract Enforcement
Singapore Management University

The transition from personal to impersonal contract enforcement is often considered important for economic development. The question not well understood is why some countries failed to make the transition. Some studies suggest a strong cultural preference for loyal personal relationships and hence for relational contracts may be a cause of underdevelopment (North 1991, North et al. 2000). This paper builds a simple model on how a society's contract enforcement institutions evolve. It suggests the inequality in resource distribution, rather than the cultural preferences, is the fundamental cause of slow legal development and economic backwardness. A society with huge inequality in endowment is likely to experience a cluster of mutually reinforcing institutions including prevalence of relational contracts, poor legal development, a strong cultural preference for personalistic relationships, and low social mobility. Latin America seems to fit into this category. When the endowment is relatively equal, the cultural preference alone does not reduce the overall welfare though it may slow down the legal development process, and it would gradually become weaker as legal quality improves. The East Asian countries seem to be appropriate examples. The western developed economies, with relatively equal endowment and individualistic culture, are the implicit benchmark case, whose transition to impersonal enforcement is the fastest.

Foreign Aid, External Macroeconomic Instability, and the Quality
of Institutions
CERDI-CNRS, Université d'Auvergne

This paper explores the effects of macroeconomic instability (term of trade fluctuations) on the quality of democratic institutions, and foreign aid capacity to protect them against this instability. Using a sample of 62 developing countries over the period 1980-1999, we adopt an econometric approach based on simultaneous equations with instrumental variables (since there is complex interrelationship between institutions, and foreign aid) and we show a negative effect of term of trade fluctuations on institutions. We also identify a positive effect of aid on the quality of the institutions which is captured by several synthetic indexes, in a context of macroeconomic instability. This effect is measured by an interactive term between aid and terms of trade fluctuations in which the coefficient proves to be positive and significant.

From current economic research perspective, we know little about the effects that macroeconomic instability could have on institutions. This paper explores this question. Moreover, it explores if foreign aid, which constitutes nowadays a major source of poor countries' development funding, can function as a stabilization mechanism. Our results could be explained by the theoretical arguments which indicate that firstly, positive exogenous fluctuations (e.g. a rise of the world prices of the raw materials or positive terms of trade shocks) could generate additional resources and cause rent-seeking behaviors (Cf. the natural resources curse phenomenon brought up in Sala-i-Martin and Subramananian 2003); they can also weaken political accountability (Brautigam and Knack 2004; Djankov and Al 2005), which in turn can lower the quality of institutions. Secondly, negative fluctuations, by interrupting stable growth, can weaken institutions, as it has been proved that a sustained economic growth is a condition for good institutions (Meyer 2000).

So, the main results of our paper is that external macroeconomic instability has a negative effect on democratic institutions, and aid has a stabilizing effect. Even if donors cannot synchronize perfectly aid to terms of trade fluctuations, the policy implications are that aid policies should take more into consideration structural economic vulnerability of developing countries, since aid can be beneficial for institutions in a context of macroeconomic instability.

Voluntary and Imposed Racial Segregation Zoning:
A Coasian-Olson Hong Kong Comparative Empirical Study
Valerius Wai Chun KWONG
The University of Hong Kong

My thesis investigates racial segregation from an economic perspective using publicly available data in land lot records (historical and current land registers in the Land Registry), property assignments, tenancy agreements, Crown/Government Leases and Conditions. It provides reliable factual evidence of publicly available and verifiable data from an economic perspective on racial discrimination.

As regards racial segregation in Hong Kong, the only serious works done were those by Lai and Yu (2001) and Lai (2002, 2004).  These authors conducted empirical research on the formation and destruction of discriminatory zoning and racial segregation.  They did not extend their research to discrimination by private organization.  Following in their footsteps, my thesis is a study on the choice between exclusionary zoning by legislation and voluntary association within a Coasian-Olson framework.

It is an original attempt to apply the "corollary" of the Coase Theorem, as interpreted by Lai, Ng, and Yung (2007) and Lai and Hung (2008), and Olson's Group Theory (Olson 1965) to test the aforementioned public data explaining the choice of racially exclusionary zoning legislation and private voluntary association in colonial Hong Kong. It aims to contribute to the research on the origins of racial segregation by investigating the formation of racially discriminatory zoning through legislation (segregation by edict) and private voluntary association (segregation by firm) as a means to exclude Chinese from European in colonial Hong Kong.  No one has ever conducted a similar study or used similar types of data from a Coasian-Olson framework.

The major finding is that a private voluntary association is more likely to form to exclude Chinese under three conditions, i.e. (a) the original number of land owners is small, (b) no Chinese land owners are found in the first instance. and (c) no quasi-racially/racially restrictive covenants in land grant documents.  If either one of the above conditions are not fulfilled, racially discriminatory legislation is more likely to form.

Why Do Not All Restaurants Charge the Meal Before Eating?
Xinyu LI
Peking University

As we know, most restaurants follow the principle "first eat, then pay" which means that you pay after the meal. However, we find some restaurants charge fee before customers start the meal. Obviously such charge arrangement could reduce the supervision cost used to prevent customers from fleeing without payment, especially in rush hour. However, why do not all restaurants follow such charge arrangement? This paper tries to answers this question from measurement cost angle and then extend the conclusion to explain the different arrangements on "order of contract performance". One hypothesis is that the more standard the meal is, the more possible the payment is charged first. The reason is following: if the transacted item is standard, the seller has an advantage of measuring the item's quality, which means that measuring quality left to seller rather than buyer will reduce cost; if the transacted item is not standard, maybe the buyer costs less to measure the item's quality. So if the measurement of traded item is left to the buyer, the seller has to do something to complete this transaction. In the restaurant case, if the meal is not so standard, the seller will give the right of paying after meal to the buyer as the compensation. Such right is important especially when there is disagreement on the quality of the meal. The bargaining power of the buyer who pays after meal is greater than the one who pays before meal. Whether the meal is standard or not, the seller intends to charge before meal because it could reduce his supervision cost. If the meal is standard, the seller has no incentive to allow the buyer to pay after meal because most cost of measuring the item's quality is paid by the seller. The general conclusion drawn from this case is that the more standard the traded item, the simpler the structure of contract. In another word, the complicated contract is used to deal with the great disagreement about the traded item.

Do Democracies Grow Faster?  Revisiting the Institutions and Economic Performance Debate
Jessica Henson Decker and Jamus Jerome LIM
The World Bank

The recent empirical growth literature has proposed three underlying fundamental determinants of economic growth, namely, physical geography, economic integration, and institutional quality. Each of these factors is likely to be important in its own right; nonetheless, the primacy of institutions appears to have been overwhelmingly accepted by most researchers working in the area. The success of empirical work in establishing the centrality of institutions nonetheless raises another important question: What sorts of institutions matter for growth?

This paper unpacks the final determinant into both political-economic institutions that govern economic norms and rules—such as legal frameworks and the regulatory burden—as well as political institutions, which is primarily that of democratic development. As such, the paper speaks to the debate on the different fundamental drivers of economic growth.

A priori, there is little reason to believe that democratic nations should necessarily grow faster or slower than their non-democratic counterparts. Theoretical work on the linkages between democracy and growth provide ambiguous outcomes. Similarly, while some early empirical work on democracy and growth has found a negative relationship, more recent papers have suggested a positive one.

Using both cross-sectional and panel datasets, we show that, once democratic development is properly instrumented, there is no evidence that democracies grow faster or slower than non-democracies; this result is in contrast to much of the more recent literature. Political economic institutions, however, remain positive and significant determinants of economic growth, which corroborates much of the empirical evidence in the literature. This result is robust to a range of specifications and measures, and is stable across both sets of data.

The empirical contributions of this study are twofold. First, we account for endogeneity in the cross section by introducing several new instruments for democracy. Second, we address endogeneity in the panel by using lagged values of the endogenous variables as instruments for the variables themselves.

Improving the Revenue System under Fiscal Decentralization in Indonesia
Tauvik MUHAMAD, International Labor Organization, Jakarta, Indonesia
Hanafi Rais, National University of Singapore

Indonesia in the past six years has been experiencing fiscal decentralization as a consequence of regional autonomy that shifted from a most centralized to a highly decentralized country. Yet the objective of the decentralization, which is to achieve better public expenditure allocation in matching service delivery to citizen preferences, is not fulfilled. Some problems related to the implementation of fiscal decentralization are relatively still unresolved, i.e., (1) lack of robust institutional arrangement and capacity, (2) high-cost economy, (3) widening regional disparity, and (4) imbalanced intergovernmental fiscal transfer.

Under decentralization, shifting the fiscal autonomy from central to district instead of province through expenditure assignment has been eventually strengthening local government and weakening provincial government. As districts play significant roles and have more power than the provincial authority, coordination and hierarchical relationship between province and district no longer work: both parties duplicated regulation on local tax.  Some regions are boosting their own revenues to finance their public expenditures. Although the districts tend to prioritize scaling up public services, they introduced local taxes by widening tax base and increase tax rate which lead to high-cost economy.

Since the regional autonomy law enacted in 1999 allows each district and city to merge or break out into separate district and city, the number of separated districts and cities has been increasing. They are mainly in the regions with rich natural resources, and that has contributed to the widening regional income disparity within the country.

Prior to decentralization, central government played a significant role in financing local governments that covered two-third of local government expenditure.  In the post decentralization, further income disparity is taking place. The General Purpose Grant as an addition to the Special Allocation Fund that transferred from central government as collected from rich natural resources to all regions within the country has contributed to imbalanced intergovernmental fiscal transfer.

This study is intended to identify the decentralized fiscal challenges and to answer what institutional arrangement and the way forward has to be set to ensure the quality of public service delivery at the local levels and an effective fiscal regime at the national level.

When Foreigners Are the Minority: To Collude or To Improve?
Alfredo R. PALOYO
Ruhr Graduate School in Economics

The separation of ownership and control in a corporation (Berle and Means 1932) has been extensively explored in the law and finance literature. It is traditionally cast as a principal–agent relationship between the shareholders and managers of a company. The image of the corporation by early researchers (Berle and Means 1932; Jensen and Meckling 1976; Easterbrook and Fischel 1991) is peculiar in that it is characterized by widely-dispersed ownership. The peculiarity stems from the fact that, apart from the Anglo-Saxon part of the world, the majority of corporations that exist today are controlled by a small group, which is usually family-based (La Porta et al. 1998; La Porta et al. 1999; Mork et al. 2005; Claessens et al. 2000).

In Gilson (2007) and Gilson and Gordon (2003), family-based control is explained away through the interplay of reputation effects and non-pecuniary benefits of control in an economy with "bad law"—that is, in an economy with poor institutions. Later researchers such as Gilson have shifted the spotlight from the agency costs between shareholders and managers, which was the customary focus of research, to the agency costs that arise out of the minority–majority shareholder relationship. However, a foreseeable gap in this line of research is the lack of distinction regarding the type of minority owner.

It is plausible that the citizenship of the minority shareholder matters in the conduct of the corporation. A foreign shareholder who comes from a country with excellent shareholder protection may insist on enjoying the same level of protection in a target company abroad. On the other hand, it is equally plausible that a foreign shareholder may collude with a corrupt majority shareholder in a country with poor shareholder protection at the expense of other (i.e., domestic) shareholders.

I wish to examine the set of conditions that determine whether a foreign minority shareholder will behave as a "good" shareholder or whether she will decide to collude with an exploitative majority shareholder. These conditions are presumably rooted firmly in the economic and legal institutions that prevail in any given economy.

An Essay on Chinese Health Reform and Local Government
Jiwei QIAN
National University of Singapore

After the collapse of the central planning system in China, health expenditures have been increasing rapidly, with the largest share of the cost being born by patients as out-of-pocket payments. To address this problem, the Chinese government is planning to reform the health system within the next decade. The new system will be built on two pillars: wide insurance coverage and a network of publicly owned township and urban community clinics. Local government (i.e. city/county government), rather than central government, will be responsible for both pillars. Local government will both manage, and be financially responsible for, the insurance plans and township/urban community clinics, subject only to broad state guidelines and with some degree of subsidy from the state. However, under the current inter-government fiscal system in China, there is a huge fiscal gap for local government between expenditure to carry out the assigned responsibilities and revenue available, which forces local government to look for off budget resources.

Since each city/county will have a public plan and a network of provider clinics, each city/county government will effectively be in a position that is similar to that of a monopoly insurance plan of the managed-care type in the United States. Although the plans will be publicly owned, city/county governments may nevertheless have an incentive to exercise their plans' monopoly power in order to increase the resources available to these governments for other purposes (such as investment), or for the purpose of paying high salaries to senior medical personnel. For local governments in poor regions, a major concern in the past has been how to pay the salaries of the personnel working in unprofitable township hospitals. The paper discusses the question to what extent this problem may be overcome by allowing private insurers to compete with the local government plans (especially in urban areas), or by strengthening the mechanisms whereby local governments are accountable to the population (especially in rural areas).

Emerging Donors in Asia and their Implications for Japan's
Foreign Aid Policies
The University of Tokyo

A region with dynamic developments, the landscape of foreign aid is rapidly changing in Asia. Japan, which once dominated the region in terms of the quantity of aid, is gradually reducing its presence, while "emerging donors" such as China, Korea, Thailand and Malaysia are rapidly increasing their aid allocation to poorer countries.

The purpose of this paper is to analyze the implications of these shifting trends by comparing it with Japan's experience as it evolved from a receiver of foreign aid into a giver. The main aim of this paper is not to discuss how increased foreign aid opportunities contribute to economic growth, but rather to analyze the changes that take place in the institutional setting in the process of becoming donors.

Case studies will be conducted in Thailand and Malaysia There are three important factors behind the choice: 1) Thailand is eager to become a "donor" while Malaysia is not. Malaysia emphasizes South-South cooperation and, unlike Thailand, does not seem to venture into providing soft loans as their repertoire of aid. Despite having comparable per-capita income, the way these two countries provide "aid" to poorer counties differ to a large extent. What factors determine a country to become one type of donor rather than the other? 2) The two countries still receive ODA from many countries; in other words, receiving and giving takes place simultaneously. What lessons have these countries learned from their experience in receiving aid, and what lessons are being utilized in their manner of giving? What are the lessons that are not being utilized and why? 3) These countries operate outside of OECD-DAC scheme of ODA. What is the institutional implication of new players joining the game under different rules?

The first part of the research will concentrate on collecting data available about emerging donors, which no scholarships has ever done in a systematic way. The second part will develop an analytical framework to compare the Thai and Malaysian policies of foreign aid. Finally, I will compare these results with the evolution of Japanese ODA and analyze its future role in the Southeast Asian region.

Resource Curse?  A Theory of Contestable Political Market with Endogenous Entry Barriers
Kevin TSUI
Clemson University

This paper provides a unified framework to study both the economic and political aspects of the so-called "resource curse." In particular, I develop a model of political competition in a two-sector economy to analyze the effects of natural resource wealth on economic policy, political development, and civil insurrection. The appropriation of natural resource wealth entails lower deadweight cost due to its relatively inelastic supply. When a political market is contestable, leaders care about popular support and hence resource wealth is an economic blessing because it reduces the cost of financing the provision of efficient economic policy. However, when political entry barriers are endogenous, resource wealth may become a political curse. Natural resource wealth induces incumbent dictators to run more repressive regimes, but will only have limited, if any, effect on democracies with strong private sector, and high costs of rent appropriation and political entry deterrence. Because incumbent dictators will spend more resource to prevent entry in response to an increase in natural resource wealth, resource wealth can have no effect on the incidence of civil war, unless the costs of maintaining or overcoming entry barriers are affected. These and other predictions are consistent with previous empirical findings on resource curse, democratic transitions, defense economics, and civil conflicts.

Why Are the State-Owned Enterprises in China Always Sold by Negotiation?
Huazhong University of Science and Technology

Which is the more profitable way to sell a company: a negotiation or an auction? In the negotiation, the seller negotiates one by one with a series of buyers who make short-lived offers, so that the seller has no opportunity to compare the simultaneous offers of competing buyers, and his revenue is determined by his bargaining position. Contrarily, in the auction the seller can benefit from the competition among prospective buyers by setting an effective bidding rule. Milgrom (1987) concludes that a seller in a relatively weak bargaining position can do as well as a strong bargainer by conducting an auction. Bulow and Klemperer (1996) show that the value of negotiating skill is small compared to the value of additional competition.

However, when it comes to the selling of state-owned enterprises in China, the situation is just opposite to the theoretical results that most of the transactions are carried out by negotiation. Why? Doesn't the seller want to raise high revenue? The reason is that the selling of a state-owned enterprise in China is actually implemented and controlled by its original manager, the agent who only concerns about his own objectives and whose behavior is costly to supervise, as it involves a long series of principal-agent relationships. Consequently, the selling mechanism is fixed at the manager's discretion. In the negotiation, the manager is easier to privately add some requirement that is biased to his benefit when bargaining with the buyers. The final result might be that any buyer who can offer a more desirable rearrangement for the manager will get the enterprise. In contrast, the winner in the auction is not completely determined by the manager, so the cost for him to control the transaction increases. For example, in order to rule out some unfavorable buyers, the manager has to canvass for a "reasonable" constraint imposed on them or even bribe the government. Therefore the choice of the transaction mechanism is determined not by the revenue criteria but by which one can realize the state-owned enterprise manager's objective more easily, and that is why such adverse selection appears.

Why Value-Based Property Taxation Cannot Happen in Transitional
Urban China?
Siu-wai WONG, Bo-sin Tang and Sing-cheong Liu
The University of Hong Kong

Compared with the growth in property markets, the development of China's property tax system appears to have significantly lagged behind. The prevailing property tax system in China is often criticized as a barrier impeding the rationality, efficiency and transparency of China's rapidly growing land and building markets, due to its heavy bias towards sale transactions and non-value means of tax assessment. Against such circumstances, value-based property tax for both property transactions and holdings has been taken by the Chinese government as a major direction in tax reform. However, little progress has been observed up to now in bringing value-based taxation into practice despite its importance has been increasingly emphasized in national policies over the past decade.

The purpose of this study is to explore why value-based property taxation cannot be implemented even when real estate in China has fully resumed its market value. Drawing upon the perspectives of New Institutional Economics (NIE), value-based property taxation is viewed much more than a simple task of property value assessment, and it should be conceived of as comprising a series of consecutive institutional systems including (1) land registry; (2) mass property appraisal; (3) tax collection and enforcement; and (4) dispute resolution mechanism. In this study, the theories of NIE, which are associated with transaction costs, property rights and institutional change, will be applied to examining the current mechanism and arrangement in property taxation in China. This study will argue that the prevailing property taxation system in China is determined by the transitional institutions of the aforesaid systems. It appears to be ineffective, complex and costly in itself, but is indeed providing an alternative solution to better capture revenue generated from the rising property markets under some given constraints and inefficient gaps in these four institutional systems.

Social Tie and Internal Knowledge Transfer: Does Culture Matter?
University of Paris 1 (Panthéon-Sorbonne)

This project combines the notion of social tie from social network research and the concept of know-how to explain the role of tie strength in sharing and transferring the personal expertise in problem-solving activities at the workplace.

By adopting a definition of the firm as "a social community", this study links social network analysis in the discipline of sociology with the knowledge-based approach in the organization science, and proposes that three aspects of social interactions affect the intra-organizational knowledge transfer: the cognitive, the relational, and the structural.

The co-worker interaction norms in different cultures at the national level are assumed to be different, thus is the pattern of co-worker relations at the workplace in local organizations. I use the term "tie strength", which is determined by the overlapping degree of instrumental tie and expressive tie, as the proxy describing this cultural difference to illustrate whether and how the co-worker relationship patterns influence the process of knowledge transfer within business firms. By knowledge transfer, I mean the transmission and the assimilation of the problem-specific know-how, which resides fundamentally in individuals. Empirical data are collected from Information and Communication Technology (ICT) firms in China.

The article to be presented is the first part of the study. I limit my discussion to the cognitive dimension of knowledge sharing between individuals and explain why the tie strength of the co-worker relationships has an influence on the transfer process, and how. Preliminary findings suggest that high level tie-overlap facilitates the share and transfer of knowledge between individuals by increasing the utilization of metaphors inside the domain of dyadic common knowledge (mutual knowledge). Data collection is in process.

Do Institutions Matter?  Estimating the Effects of Institutions on Economic Performance in China
Yang ZHAO and Ying Fang
Xiamen University

Institutions are believed to be one of the main factors to determine an economy's long-run performance. However, how to quantitatively measure the effects of institutions? The answer to this question is of great importance for us to understand the role of institutions, and of great difficulty, too.

The main difficulty in estimating the effects of institutions is that institutions are endogenous. Richer economies are able to afford better education, more lawyers and prosecutors, more educated government officials, better news media, thus, better institutions. Moreover, there could be other factors, such as geography, that affect both institutions and economic performance. Because of the endogeneity of institutions, the OLS estimate of the effect of institutions on economic performance is biased, making it impossible to determine the causal relationship between institutions and economic performance. In order to obtain the unbiased estimate, we need to find an instrumental variable for institutions.

As highly diversified in local institutions, geography and government policy, China offers an interesting case to learn the effects of the three factors quantitatively. In this paper, we try to measure the economic effects of institutions with city data of China. We employ the two-stage least squares (2SLS) method to do the estimate. We adopt the enrollment in Christian lower primary schools in China in 1919 as the instrumental variable for China's current institution of property rights protection. We believe a city's current property rights protection is related to the extent to which the city is influenced by western countries during China's modern history. The enrollment of Christian lower primary schools in early 20th century reflects such influence by western countries in China. Our instrumental variable survives the careful checking of the exclusion condition.

We compare the effects of institutions with that of geography and government policy. The results show that institutions dominate geography and government policies as explanation of the variation of economic performance among our sample of 47 Chinese cities.

An Evolutionary Game Model for China's Medium- and Small-Scale
State-Owned Enterprise Reform
Ninghua ZHONG, Peking University
Ji Shen, Yale University

The article tries to explain the long existence of China's medium- and small-scale state-owned enterprises in spite of their increased deficits. As the principle, China's government keeps state-owned enterprises as the main social welfare providers. It faces a tradeoff between subsidies for deficits and bonus as incentives. If the bonus is relatively more expensive, the government tends to ignore managers' poor working attitude and pay for the consequent deficits; otherwise, the government will pay high incentive bonus to avoid subsidizing the deficits.

Referring to the concept of the quasi-parameter (Greif 2004), the article depicts cyclical change of internal incentive mechanism. In our model, the variable "deficits subsidy" changes slowly with managers' working attitude, and can be viewed as fixed and exogenous in the short run while endogenous in the long run. If deficits reach a critical level, the government would provide high bonus to motivate the manager to work hard, which results in decreasing deficits. Once the deficits are below the critical level, maintaining the high level of incentive is no longer the expenditure-minimizing choice. So the government lowers the incentive, which makes the manager revert to a shirking strategy, and the deficits increase accordingly. This cycle of incentives can cause the birth of the new incentive mechanism, and lead to its demise as well. By this cycle, the article explains why series of incentive measures were taken but all failed to solve the low incentive problem.

Comparative statics shows a substitution effect between internal incentive and external market competition. This is because, basically, they are both mechanisms capable of mitigating the asymmetric information problem.

Multiple equilibriums exist in our model. With the perfect rationality assumption of classical game theory, players achieve an equilibrium outcome in one shot. In contrast, based on the hypothesis of bounded rationality, evolutionary game theory supposes that players achieve the optimal strategy step by step through experimentation, emulation, comparison and learning process. We utilize this dynamic nature of the evolutionary game to know more about players' responses to institutional changes. Simulation shows in the process of reform, incentive would not necessarily lead to managers' working hard, and vice versa.