2010 Shanghai Workshop: Abstracts

DECEMBER 12–18, 2010


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Measuring Transaction Costs in the Chinese Economy
Fengyuan DA
Southwest University for Nationalities

Measurement of transaction costs is of great theoretical and realistic significance for the new institutional economics. Douglass North made a pioneering research of transaction costs measurement in 1986, but his research was limited to the transaction costs of transaction sectors, and overlooked non-market transaction costs (NTC). Alexandra Benham and Lee Benham (1998) used the cost of exchange to measure NTC, but their measurement was on the microcosmic level, blank in the research of general transaction costs of the economy. Now in China, all existing researches of transaction costs are measured by the labor award of transaction staff of transaction and transformation sectors, or directly by the industry's added value. However, the result measured in this way seriously deviated from the actual transaction costs. Especially for the developing and transitional country such as China, due to the imperfect development of official transaction sectors in economic exchanges, there are large amounts of non-measurable NTC. Moreover, the criteria for success or failure of reform and the growth characteristics can be illustrated through the changes of NTC. Therefore, a new method is needed.

This paper uses North's theory to re-measure transaction costs of transaction sectors in China on the three industries' level, and constructs a MMIC model on the basis of SEM method to measure the NTC on the macroscopic level indirectly. Here, we set NTC/GDP as the latent variable, and set government regulation, communication infrastructure, networking development level, effective transformation of system, actual GDP and such measurable variables as the cause variables and index variables of the latent variable; then calculate by the software Amos 7.0 the value of the latent variable and the influence of cause variables upon NTC (i.e. the loading factor). To be brief, the measurement theory stated in this paper on one hand validates whether the variation of China's transaction costs coincides with the historical experience of developed countries, and on the other hand evaluates from the perspective of transaction costs the economic achievements of China in the transition period, and finds out the crux decisive for China's high NTC.    

The Impact of the Securities Regulation Code and the Revised Disclosure Rules on the Information Efficiency of Philippine Stock Prices
University of the Philippines, Diliman

This paper investigates the impact of the enactment of the Securities Regulation Code and the enforcement of the Revised Disclosure Rules in the information efficiency of the Philippine stock prices. A sample number of listed companies are drawn from the total of 240+ listed companies currently listed at the Philippine Stock Exchange. We highlight the important role of laws and regulation in strengthening crucial financial institutions such as the stock market. More importantly, the impact of the Securities Regulation Code and the Revised Disclosure Rules is significant in determining the response to the 1999 BW Resources stock price manipulation scandal that shook the Philippine capital market. Previous similar research overseas has shown that introduction of new regulation did not only momentarily improve the information efficiency of stock prices but persisted in later periods. We extend the analysis by taking into account the contributory impact of the institutional makeover of the local bourse when it demutualized in 2001.

Optimal Design of China's Health Insurance System:
A Case under Asymmetric Information
Hao DONG and Meng Tian
Peking University

Information asymmetry exists between patient/buyers, physicians/sellers and social insurance agencies in health insurance system, thus frictions might be caused by physicians' rent-seeking behaviors and therefore, patient/seller-dissatisfaction may arise and social welfare be undermined. In a general model of health insurance system, we compare two types of equilibria: (1) a trilateral dynamic game with incomplete information between patient/buyers, physicians/sellers and social insurance agencies; and (2) a bilateral game between patients and the combination of physicians and social insurance agencies.

Our analysis shows that when the government finances a health care institution a fixed amount of insurance expenditure according to the number of patients go to this institution last period and patients get their insurance through their doctor, external costs between health care institutions and insurance agencies can be internalized and thus the frictions will be drastically reduced. A number of specific issues concerning health care provision have been considered in the model, such as state-dependent patient utility and supervisory costs.

We find the surplus of the insurance fund should be retracted each period in order to ensure proper incentive of the health care providers. We also show that the results from international empirical data consolidate our findings in the game-theoretical model. By these, we conclude that incorporating health care and health insurance institutions together may result in an optimal design of health insurance system. As an attempt, we analysis China's data by our model and find that most part of our conclusion can also be applied to China.

Contraception and Fertility Preference in the Philippines:
Exploring the Influence of Poverty
Vigile Marie B. FABELLA
University of the Philippines

This paper examines the link between fertility preference and contraceptive use across income groups in the Philippines. In a country where population growth has become a major economic issue, family planning is a crucial instrument for policy intervention. At the micro level, it allows couples the liberty of choosing and attaining their desired family size. At the macro level, availability and access to family planning services can reign in the country's fast-increasing population growth. Also critical in this relationship are the differences across income groups of contraceptive use and fertility behavior. There is no question that the poor have relatively more children than the rich but what matters for policy is whether or not this high fertility among lower income groups is due to limited accessibility of family planning services or to a preference for larger size families.

Orbeta (2006) has shown using 2002 data from the Family Planning Survey that limited access to contraception is likely to be the cause of larger family sizes among the poor. In particular, the low income groups desire fewer children but use less contraception than the higher income groups.

This paper aims to re-evaluate these relationships in the light of more recent data from the National Demographic and Health Survey of 2008. Preliminary results reveal that the demand for relatively less contraception by the lover income women is not despite of their desire for fewer children (the Orbeta hypothesis) but because of their desire for more children. The Orbeta results are not observed. Although this must be explored in more detail, it suggests that it is fertility preference, not limited access to family planning services, which drives the high number of children among the poor.

Access to and Development of Technical Assistance Markets:
An Analysis of Peruvian Peasant Economies in the Rural Highlands
Grupo de Analisis para el Desarrollo

This research analyzes, through a mainly theoretical approach, how technical assistance markets are developed within Peruvian peasant economies. This study will identify the main restrictions for the development of massive institutional ways of sustaining exchange of technical assistance. In other words, if peasants have a demand for technical assistance and are able to express it, the main question is, why are technical assistance markets not developed?

In the context of a predominantly capitalist system along with high poverty levels in the Peruvian rural highlands, many researchers have noticed the importance of endogenous technical change as a necessary condition for the development of peasant economies. Market institutions can provide a way to achieve it.

This problem is theoretically framed as a game where the peasants have to choose between exchanging and not-exchanging technical assistance. The empirical research is conducted using experimental economics. This method is able to replicate scenarios that do not necessarily exist. In order to obtain more realistic outcomes, we use the revenues of technical assistance that are reported in the National Households Surveys in the experimental design.

The preliminary outcomes suggest that information costs are high, and also the main reason that explains why technical assistance markets are not developed. When peasants acquire more information about the quality of the service offered, more hours of technical assistance they ask for; hence, they obtain more revenues. The absence of the state causes that the transaction costs have to be assumed by the peasants. Therefore, the not-developed markets are generated. Information must not be understood as a public good. The research frames information as the possibility to know the service qualities that are being traded, as well as to know who offers this service. Acquiring it would cost too much for not entirely safe profits. The probability of being cost-benefit successful in finding a technical assistance provider is not known. Without support and with little information involved, the peasants are stuck in an equilibrium where they offer and receive very little technical assistance.

Scale Economy in Job Getting: Evidence from Urban China
Hong GAO and Qunli Zhou
Fudan University

The relationship between city scale and one's probability of getting a job is an essential topic in urban economics, and human capital externality is of great importance for the understanding of agglomeration economy in cities. In this paper, we try to empirically find out whether one is more likely to get employed in cities with larger population, so as to provide micro-level evidence for agglomeration economy in the urban economy.

Using data from CHIP2002, individual level Probit models are estimated. Regression results show that it is more likely for individuals to get employed in cities with a larger population. This scale effect of cities is, to a large extent, the result of concentration of high-skilled workers in that city. Also, we find the scale advantage of big cities being heterogeneous among individuals with different levels of education, with individuals who have higher levels of education benefit less.

Why Have Virtual Enterprises Become Possible?
A Study of Asset Specificity and Contract Risk
Yanwei HAO
Fudan University

The IT technology revolution makes the division of work globally possible.  More and more enterprises became part of a global manufactory network in the way of intra-industry trade or even inter-firm trade, which makes the establishment of virtual enterprises possible. New organization means new form of contracts.

Based on asset specificity, Oliver E. Williamson's Transaction Cost Economics analyzes the regulation forms of different contracts in the market. He classifies transaction activities into six types, according to frequency of transaction repetition, uncertainty of transactions, and types and degree of asset specificity of supply goods and services. And then, differential matching contracts are given accordingly.

In order to analyze how the IT technological revolution and new production mode have changed enterprises (contracts), this paper endeavors to build a principal-agent model within the framework of Williamson's Transaction Cost Economics.

A production function for the Agent that includes the variable of asset specificity is set in this paper to compare the results of different transaction contracts under assumptions of symmetric and asymmetric information, and to analyze the characteristics of behavior of Principal and Agent.

Our primary study finds that, under the assumption of symmetry of information, if the Agent invests in specific assets, the allocation of risks between Principal and Agent does not change, which only increases the costs of the Principal. Under the assumption of asymmetric information, the existence of specific asset investment will increase the risks of both Principal and Agent, which will not only lead to an increase of cost payment and risk expenditure of the Principal but also make the Agent decrease its efforts. As a result, the degree of asset specificity is the key factor that impacts cost and risks. It would be changed by IT technology and new production mode and lead to the emergence of virtual enterprise.

To Become Homo Economicus: Concentration and Benefits
of Chinese Communist Party Membership
Yunzhi HU and Yang Yao
Peking University

Traditional market transition theories predict that the ruling party will gradually lose its attractiveness towards new entrants, since the marketization process reduces the privileges to its members and provides an alternative path for socioeconomic mobility other than joining the Party. However, former redistributors in the planned economy are still able and willing to stay in control over the state economy by gripping monopolistic sectors—the most profitable sectors in the market economy — and consequently attracting entrants by distributing enormous economic rents. Macro statistics in China contradict the market transition theory by showing that the number of Chinese Communist Party members kept increasing constantly with more intellectuals recruited during the past decades. Most studies explain this contradiction by probing into people's incentives to join the Party while neglecting the demand side of the Party members' market. In fact, the Party organization has also adapted its recruiting criteria to the new environment to favor those already in strategic positions in the market economy.

Based on an urban survey of China in 2002, we contend that the Party organization concentrates more on the monopolistic sectors as the market economy grows and distribute the rents to Party members working in the monopolistic sectors. Because of high rents such as promotion and income premiums, Party members in the competitive sectors intend to join the monopolistic sectors and people already there want to join the Party. From the demand side, the Party organization in monopolistic sectors has formed a club which is open to these above new members to strengthen its control over the monopolistic rents.

Roving Bandits in the Philippine Bureau of Internal Revenue:
A Study of the Impact of Officer Tenure on Tax Collection Efforts
Marianne N. JUCO
World Bank Office Manila

The systemic corruption and tax administration problems in the Bureau of Internal Revenue in the Philippines have resulted to poor tax collection effort, which has contributed to the country's budget deficits, fiscal imbalance and under provision of public services and infrastructure. An analysis of the existing tax collection system reveals an administrative inefficiency in terms of the frequent reshuffling of revenue officers in charge of tax collection. This reshuffling system was put in place with the goal of preventing collusion between tax collector and local governments which was assumed to develop when both parties have had significant time to interact with each other.

The theory of the roving bandit provides an antithesis to the above hypothesis. The theory asserts that a roving bandit has incentive to steal more compared to a stationary bandit who limits stealing to a sustainable level as a means of ensuring a stream of future earnings. According to theory, corrupt revenue officers would steal more if their tenure in a revenue district were brief. In short, theory suggests that shorter posts result to lower collections.

This paper aims to examine the theoretical and empirical implications of the existing Bureau of Internal Revenue officer reshuffling system on tax collection. We aim to test the relationship between collections and officer tenure using a panel data of annual tax revenues collected in the 115 Bureau of Internal Revenue districts over the period 1999-2007, collated through official Bureau of Internal Revenue annual reports. The schedule of revenue officer transfers for the period was obtained through the author's own research and official Bureau of Internal Revenue transfer documents.

Finally, we wish to show that increased frequency in reshuffling translates to shorter tenure which effectively results to lower tax collection. And we aim to recommend a longer tenure post for the Bureau of Internal Revenue staffing system to increase the tax collection effort, following from the theoretical implications of our results.

Land Property Rights and Industrial Land Use Efficiency:
A Case Study of Shenzhen
Yani LAI and Lennon H.T. Choy
The Hong Kong Polytechnic University

Industrial development has contributed significantly to China's economic growth in the past three decades. As one of the most fundamental institutional arrangements, the urban-rural dual land system plays an important role in China's industrialization process and hence economic growth. Two types of land including state and collective ownership coexist in the current land administration system. Full rights could be acquired through state-owned land market, whereas collective land cannot be sold, transferred, or leased for non-agricultural construction.

Based on available literature, statistical data, a range of unpublished primary sources, and the author's own experience, this study attempts to investigate how different property rights structures on land may affect the efficiency of industrial land use. Shenzhen is selected for the case study.

The Shenzhen special economic zone was established in 1980, to which the state-owned urban land use system was almost thoroughly applied in the four districts from 1992. In the same year, two adjacent new were incorporated to Shenzhen city, where most lands were collectively owned. Since then, urban and rural dual land system has come into being in this city. The coexistence of two different types of land ownership in Shenzhen city provides an appropriate case for this study.

The result indicates that the incomplete collective land property rights system causes inefficiency of industrial land use in terms of i) lower industrial output value and ii) lower development ratio when compared to complete state-owned urban land system. The inefficiency is attributed to two main reasons: i) collective land with incomplete property rights has no access to legal land market and credit market, and ii) collective land is not included in the land management system, thus cannot be guided and controlled effectively by urban development strategies and policies. The study concludes with an assessment of the recent land policy reforms and a discussion of some likely institutional changes in the future.

The Role of the Institutional Structure in the Non-democratic Regime
and the Impact of Powerful Players on Policy Consequences:
The Case of Pre-modern Korea
Don S. LEE
University of California at San Diego

How does the constitutional structure of a polity affect policy making?  The definition of authoritarianism as the alternative to democracy often fails to account for the institutional arrangement that facilitates policy making within authoritarian regimes.  In this paper, I examine the variation in the institutional structure of non-democratic regimes.  I argue that the competition and conflict between powerful players in the non-democratic regime dynamically affects the policy stability within the polity. 

The pre-modern Korean regime is an interesting case where the regime was not characterized by a monopolistic use of power by the monarch but rather consisted of the separation of powers with permanent equilibrium between the monarch and the aristocracy.  The case of pre-modern Korea therefore allows me to empirically examine the coexistence of authoritarian regimes and seemingly democratic institutions.  I derive my hypotheses from a veto player framework to scrutinize the impact of competition and conflict between players on policy outcomes.  To test these hypotheses, I employ a fixed-effect model on time-series data that consist of yearly observations of pre-modern Korea from 1392 to 1800. 

I find that an increase in the number of power-oriented, but not ideology-oriented aristocrats leads to higher policy stability as operationally defined by the policy acceptance ratio.  In most cases, the strong veto gate functions to maintain policy stability.  Finally, under crisis situations, policy stability is less likely to persist.  However, the findings suggest that policy stability is more likely to persist as the number of powerful aristocrats increases.  Players can change an undesirable status quo if they are more decisive, and policy replacement occurs more frequently. 

Accountability in One-Party Government:
Rethinking the Success of Chinese Economic Reform
Yuan LI and Mario Gilli
Universita Cattolica del Sacro Cuore
and Universita degli Studi di Milan-Bicocca

It might be expected that autocracies have significantly worse economic performances than democracies, because of lack of accountability. However, the empirical evidence on the relationship between economic growth and democracy is not-clear cut. Modern China is a case in point. Susan Shirk (1993) suggested that in the Chinese political system there is a sort of "reciprocal accountability" between the top leader and the selectorate.

This paper builds a theoretical model based on the selectorate theory to explain why the Chinese central government adopted economic-enhancing policies during the reform era in the absence of regular elections, while other autocratic governments, like those in Sub-Saharan Africa, did not. We consider a contest where the incumbent leader may be either congruent or not and where both types need the support of the selectorate to hold on power.

We find that to restrain the opportunistic behavior of the non congruent leader, the size of the selectorate should be intermediate: if too small, the selectorate becomes complete loyal and has no disciplinary role, if too big, the leader's incentives are diluted. We also find that successful autocracies need more far-sighted politicians than their counterparts in successful democracies. However, this "reciprocal accountability" alone cannot explain why China is not a kleptocracy as commonly seen in other similar countries. This motivates a generalization adding citizens as a third player into the model, whose possible protests can induce unrest and possibly revolutionary coups. The result shows that facing the threat of revolution, the government will adopt growth-enhancing policies, using high economic growth to compensate for unequal income distribution, as a strategy to legitimize their rule and to resolve potential social unrest.

Why Cannot Privatization Provide Better Public Services?
A Comparative Study of Two Rural South China Villages
Samson Zhuojun LIU and Bo-sin Tang
The Hong Kong Polytechnic University

In rural China, public services such as education, medical care, and refuse collection are provided by the villages themselves rather than by the central or provincial governments. Due to different levels of economic development and institutional arrangements, the qualities and types of public services provision are uneven from place to place. Generally, the source of financing such provision is mainly from the annual revenues of the villages obtained from land leasing or earnings of rural enterprises. The more abundant income they acquire, the more capable they are to support local public services. Nonetheless, there is evidence to indicate that not all the villages with hefty incomes can perform equally well in providing comparable quality of public services to the villagers. In some villages, a "rural shareholding system" has been implemented in which the village revenue is distributed to individual villagers in the form of share dividends after the local authority - the villagers' committee - has retained a portion for the purpose of funding public services. In other places, all the village incomes are still fully controlled and left to the local cadres, as the authority of the village collective, to decide on their use.

It is usually considered that unclear property rights arrangement will lead to inefficient outcomes and hence the ambiguous collective ownership, management and use of village's assets may cause inefficient use of revenues and social conflicts. However, through case studies of two villages in  southern China, we find that privatization in the form of a rural shareholding system may not always provide better public services than the collective management model in terms of per capita investment and the scale and scope of provision. In addition to the property rights regime, other elements such as cadre leadership, historical and cultural factors, and higher-level government intervention are also essential for social and welfare development in the Chinese countryside.

To Leave or to Stay: How Desertification Influences Environmental Migration in Northwestern China
KuoRay MAO
University of Kansas

My project studies the connection between desertification in Northwestern China and patterns of rural to urban migration in the region under the context of neo-liberal economic expansion. I am interested to find out why a great proportion of rural residents decide to stay behind to farm in areas experiencing desertification even when official restrictions on rural to urban migration have been abolished in recent years. I will examine how the Western China development policies and desertification affect the flow of migration and patterns of stratification in both rural and urban areas in Gansu and Shangxi province. Particularly, I want to study their combined effect on the accumulation of human capital and migration in Northwestern China. My current hypotheses is that desertification in rural areas in Northwestern China weakens social institutions and hinders the accumulation of human and social capital in poor households, which then becomes barriers for potential migrants to relocate to regional cities and block development in the region.

China's participation in global capitalism involves the gradual transformation in economic institution and social organization. For hundreds of millions of Chinese, globalization represents a fundamental transformation in the relations between labor and means of production and subsequent establishment of market institutions within the state sector. Starting in 2000, the Western China development policies have injected much needed capital to promote structural changes in rural economy in NW China. Nevertheless, numerous surveys since 2000 indicate that the region has the lowest percentage of urbanization and private sector growth compared with other regions in China, even when the policy has improved infrastructure and legal institutions to attract oversea capital. The transformation in social institutions in Northwestern China combined with the effects of neo-liberal economic expansion and ecological deterioration is central to the sociological analysis of desertification and migration in the region. My research therefore studies institutional transformation situated on the intersection of the neo-liberal development in multi-ethnic social contexts with a fragile, deteriorating nature environment such as one would find in Northwestern China. 

Gaming City as a Public Good in Macau: 
Land Administration as a Public Choice?
Cyrus York Yee MOK
University of Hong Kong

Due to historical background and natural/administrative resources endowed in Macau, the gaming industry is the main source of public finance and the core driving force for the city's development. Therefore, expansion is needed to utilize these resources effectively to attract oversea investors for further growth and hence sustainable development. Land disposal is used as one of the administrative tools for the liberalization of the gaming industry in 2002. Through our analysis (total land premium and gaming tax from 2000-2009), land disposal is far below the market price but provides a leverage effect to induce higher government income from gaming revenue. The Macau government selects the public goods of "gaming city expansion" by changing gaming provision from an imperfect market toward a more perfect one as a conscious public choice. Thus, the land market in Macau is not regarded as totally a market failure as it is planned for this macro goal. But some misallocations of land use, corruption, and other defects that happened in the past few years are due to the repulsion that resulted from incompatible legislation and monitoring/enforcement system with the intense speed of development. The relatively low land prices achieved provide a high profit margin and incentive for potential rent-seeking activities due to the inflexible loopholes inside the system. Also, the effectiveness of this policy highly depends on integrity and GuanXi.

In Macau's current political environment, if land administration is just used for achieving one single goal for the gaming industry, then the end product will be more certain and persuadable. However, as several objectives (social stability, lobbying of local interests and income redistribution) need to be completed at the same time, the contradictory cause and effect relationship would make the result highly unpredictable. The government is advised not to be so aggressive in this transition period, especially when the resources are not well established in Macau and the true public preference is not easy to quantify. Otherwise, some social problems are likely to be expected such as middle class distress and polarization, especially where institutional defects allow costs to be passed on to others without proper punishment and monitoring mechanisms in the SAR ideology.

A Dynamic Model for Understanding Social and Cultural Differences
in Attitudes towards Corruption: Experimental Evidence from
Auckland, New Zealand; Kolkata, India; and Bangkok, Thailand
University of Auckland

Given that corrupt behaviour is a violation of implicit norms of honesty, it is possible that societies or cultures that are more willing to punish such violation will be more successful in rooting out corruption. In this paper we investigate some aspect of corrupt behaviour using the sequential-move corruption game suggested by Cameron, Chaudhuri, Erkal and Gangadharan (2009). This paper extends the results reported by Cameron et al. in a number of ways. First, we look at decision making in a dynamic setting for this game. We study social learning among subjects by allowing them to play a one-shot game for ten periods. Second, we address the following questions; to what extent does this game capture corrupt behaviour? Are there any framing effects? How does the history of past corruption and punishment affect the current behaviour? Does income inequality cause corruption? Third, we examine a dynamic corruption game across different cultures by comparing data from New Zealand, India, and Thailand.

We find dynamic trends in bribery and punishment.  On average participants bribe less often and punish a corrupt behaviour more often in a randomly re-matched repeated play than in the one-shot game. Our study shows the following:

1) Replacing terms such as "bribe" and "punishment" with "transfer" and "reduce the payoff to Player A and B" respectively increases the bribe rate and decreases the punishment rate.

2) Showing the subjects the previous results (history), that the majority of the citizens punished corrupt behaviour, does not have a significant effect on either bribery or punishment.

3) Income inequality is not the cause of bribery.

4) Despite the fact that New Zealand is ranked among the least corrupt countries, we find New Zealanders have a higher propensity to offer bribes than subjects in countries ranked among the most corrupt - India and Thailand. We also find that subjects in India and Thailand punish bribery more often than subjects in New Zealand.

Veto Players and Corruption
University of Notre Dame

The core argument of this research rests on the assumption that corruption is a very complex phenomenon, and that democracy potentially offers both constraints and opportunities for it. Democratic institutions are expected to generate different incentives that, when combined, shape the level of corruption. The way these sometimes contradictory incentives impact corruption is, however, extremely unclear. This research relies on the assumption that the Veto Players Theory is particularly helpful in clarifying the broad and nebulous relationship between democracy and corruption, the latter being, for the purposes of this research, restricted to what is known as "political corruption" or "high-level corruption".

Even a minimalist definition of democracy would recognize that democratic systems are characterized by certain levels of participation and competition. These two elements naturally bring more actors into the political game. Negotiation guarantees that agreements will be reached and decisions will be made. However, democracies can assume different forms and, as some real experiences have shown, an excessive number of actors with power to decide public issues can lead to the crossroads of ungovernability. In these cases, political negotiations of all sorts may be accompanied by illicit acts which aim to facilitate political compliance.

Therefore, my research employs the Veto Players Theory to test the argument that democratic institutions could offer incentives for corruption. From this general argument, I develop some empirically verifiable hypotheses which suggest, contrary to most of the recent work on the topic, a positive relationship between the number of veto players, as well as the ideological distance between them, and levels of corruption. Possible causal mechanisms for this expected connection are also carefully specified. 

Given the absence of precise data on corruption, this research aims to employ existing indicators - perceived corruption and corruption scandals - as proxies. In order to assess the validity of my argument, I use Tsebelis' and Ha's dataset on veto players in advanced industrialized countries, and also new data I have compiled personally on veto players in some developing countries from Latin America.

Institutional Drivers of Over-Extraction of Water in Mexico
National Institute of Ecology of Mexico

One third of Mexico's aquifers are overexploited. One of the main drivers of overexploitation is excessive extraction of groundwater for agricultural purposes. There are two main causes for excessive extraction: the subsidized electricity fees for agricultural groundwater pumping, and the institutional weakness in monitoring and enforcing property rights. The farmers only pay 2/10 of the total cost of electricity for groundwater pumping, 50% of the total ones do not have concession, and only 10% of the legal ones have volumetric measuring.

The objective of this work is to analyze the institutional drivers of the inefficient outcomes of the quantity allocation mechanism chosen by the government instead of a pricing groundwater mechanism. This research will provide econometric evidence about the relationship between over-extraction of groundwater for agricultural purposes, inadequate definition of property rights, high transaction costs of searching information for trading, bargaining and enforcing water entitlements, and asymmetric information among the farmers and water administrators.


1. Inadequate definition of property rights has a positive relationship with the over-extraction of agricultural groundwater.

2. Positive transaction costs of monitoring, enforcing and bargaining water concessions among the farmers have a positive relationship with the over-extraction of agricultural groundwater.

3. Hidden information between farmers and water authorities has a positive relationship for over-extracting agricultural groundwater.

Method of study

Following Tietenberg (2006), Tsur, et al. (2004), Furubotn & Richter (2005), Weitzman (1964) and Coase (1960) we will review the institutional economic theory for water allocation mechanisms analyzed by policymakers: 1) pricing (direct or indirect) and 2) quantity allocation mechanism. Using the Groundwater Users Census 2008 & 2009 for nine overexploited aquifers, we will run an econometric model to analyze the influence of property rights definition, transaction costs of monitoring, enforcing and bargaining the entitlements, and asymmetric information on the probability of over-extracting groundwater using a quantity mechanism of allocation. Finally, we will suggest policy recommendations to improve the quantity allocation mechanism or to suggest an alternative institutional allocation

How Institutions Affect Happiness
Houze SONG
Unirule Institute of Economics, China

This paper empirically assessed the effect of political institutions on people's subjective welfare, based on a 2010 survey covering 6,577 residents living in 30 large cities in China. Indicators measuring the level of government accountability, political participation, and the power of local people's congresses in the 30 cities are constructed based on data collected from the same survey.

Happiness studies have mainly focused on how demographic and economic characters like income, age, education, etc. affect people's subjective wellbeing. Yet there are few studies on how institutions affect people's reported happiness, and most of the existing literature is on democratic countries. Since China has been widely seen as "Development without Democracy", I am interested to study how undemocratic political institutions undermine people's welfare even if they foster economic growth.

OLS and ordered logit model are used to assess the effect of institutions on happiness. I found institutional variables have a sizeable positive and significant influence on happiness, i.e. the more democratic is the local government, the happier the people. This pattern holds after controlling for demographic, economic and regional indicators, and is robust under different model settings.

To test whether this relationship is caused by happy people moving to more democratic cities, I run all the previous estimation on the subgroup of local residents (local residents are identified based on Hukou) and find the results do not change. In addition, since the ruling communist party uses economic performance to evaluate officials, and in principle citizens have no means to hold local officials accountable, the hypothesis that happy people create democracy is also rejected. Each city's political institutions could be seen as exogenous in this study. So it could be concluded that democracy could enhance people's happiness in China.

Property Rights and Political Competition: Economic Analysis
State University – Higher School of Economics

The purpose of this project is to get a better insight into the underpinnings of secured property rights. We posit that the turnover of political elites (veto players) is positively related to the quality of the property rights regime. There are two plausible mechanisms supporting such a conjecture. The first is more traditional – the more competitive political life is, the stronger are the incentives policy makers in power have to supply secured property rights, thus improving the odds of winning voters' support and getting re-elected. The second, more novel view which is the centerpiece of our analysis is that ruling elites could be interested in secured property rights in the likely case they lose power and need protection from expropriation when they cannot any longer rely on the "administrative resource".

We're seeking evidence of the second mechanism at work. To that end, a forma model is presented that conforms to the above logic and generates testable hypotheses. For econometric estimations we used a database compiled from different sources such as Database of Political Institutions, Polity 4, Economic Freedom of the World, etc. The main explanatory variable, the probability of replacement of veto players, was constructed from the above-mentioned databases. A set of panel data covers 58 developing and developed countries from 1980 to 2005. An econometric model employing this panel supports the above hypothesis. An interesting conclusion consistent with our hypothesis is that the impact of elites' turnover on security of property rights is stronger in countries with a less established rule of law, e.g. in lower income developing countries and those with less democratic regimes.

Our plans for future research include validation and robustness checks of the observed pattern by using alternative estimation techniques. We also intend to test the same hypothesis by using Russian regional data.

Why Do People Overwork?
Huazhong University of Science and Technology

Overwork generally means the reduction of workers' welfare. This is because overwork reduces workers' leisure time, damages their health condition, and even more severely leads to death. In the macro field, incumbents' overworking cuts down on the enterprises' demand for new workers and thereby curbs the driving effect of economic growth on employment. As demonstrated by general principles of economics, overwork cannot exist in normal circumstances. Overwork is not only common in China at the present time, but becomes more serious. So, we will wonder why it happens.

From the perspective of enterprises, we can see that the transaction costs of employing more workers are higher than those of the payments to overwork by incumbents, which leads enterprises to be more likely to increase the labor supply of incumbents when they increase their production. From the perspective of workers, the up-to-down implementation of the promotion tournament within the enterprise which is taken as an incentive measure compels the staff to enter into a strongly competitive environment which makes workers sink into a state of overwork unconsciously.  Outside the enterprise, workers face the critical oversupply in the labor market and increasing survival pressure. All these threatening factors force workers to work harder to preserve their jobs, which lessens workers' bargaining power for their payments for overwork.

Meanwhile the existence of the implicit incentive mechanism of achievement motive and reputation stimulation based on traditional Chinese culture makes workers attain more satisfaction only by winning the promotion tournament. Workers suffer from decreases in physical well-being while they enjoy the spiritual satisfaction from overwork in this value. Therefore, active overwork is becoming a rational choice for workers.

Regulation and Its Institutional Effects on China's Taxi Industry
Chenli YOU
Transition Institute, China

Nowadays, many of China's important industries are controlled by the government. These real monopoly industries which are created by political power have been making great harm to China's economy. Among these industries, the taxi industry is not a huge or significant one, but it has a close relationship with demotic routine life. The analysis of this small but important industry can give us a brief prospect of the condition of China's monopoly industry.

China's taxi industry is now totally regulated by the government. This regulation includes quantity control, price regulation, and quality regulation. Among them, quantity control is at the core position which causes the basic social problems. Along with quantity control, the deprivation of taxi licenses from the original taxi operators by the government has also created many social contraries.

Quantity control is in fact a fundamental invasion of private property rights. It gives government the exclusive right to issue taxi license and forbids citizens the right to operate a taxi freely. Since the government is the only agent who can decide how many taxi plates should be issued and it has the inherent deficiency of being unable to acquire enough information, the quantity of taxis operating is always incapable of satisfying consumers' transportation needs. And this is why there are many illegal taxis around the country. And this lack of taxis increases the price and waiting time. Or we can say it increases the transaction costs of the taxi industry.

Quantity regulation in China also increases the price of the taxi licenses. The price of a taxi plate is more than 1 million RMB in some big cities. The high price makes the plates the focus of the taxi industry. Many companies and individuals make use of their relationship with government to deprive the plate---the basic property right of taxi operation---from the original operators. This deprivation not only increases transaction costs in daily operation, but also creates many lawsuits which are concerned with violence and even homicide.

The only way to solve the problems above is to decrease transaction costs and remove quantity regulation, which can fundamentally establish private property rights.

Missing Markets for Use Rights Transfer of Agricultural Land in China
Cheryl Long and Yan YUAN
Colgate University and Southwestern University of Finance and Economics

Although rural land is collectively owned in China, the use rights of agricultural land have been contracted to Chinese peasants since the late 1970s. The practices of transferring use rights in agricultural land started as early as 1978, and such transfers have been officially sanctioned in the Rural Land Leasing Law passed in 2002.  However, given that such transfers have been shown to substantially increase agricultural productivity and household income, the proportion of rural land and the percentage of rural households involved in land use rights transfer have been surprisingly small. A substantial part of rural China has not seen any transfers in the use rights of agricultural land.

What factors account for the missing markets for use rights transfer of agricultural land in China? In this paper, we explore the potential explanations using a unique data set that includes both village level and individual household level information. Our research up to now has made the following findings. First of all, villages with higher coverage rates of medical insurance, previous land appropriations by the government (i.e., with previous experience of commercial opportunities), and elections are more likely to have their villagers engage in land use rights transfers. In addition, households from villages with a more heterogeneous population and better road conditions are more likely to transfer land use rights with households from outside their own villages. At the household level, age structure is shown to significantly affect the decisions in transferring land use rights. We are exploring how the interactions between household demographics, education, and infrastructure quality (such as road conditions) affect households' land use rights transfer decisions.

Although our research is still ongoing, the preliminary findings we have so far seem to suggest the following conclusion. Markets do not happen automatically. Instead they need to be facilitated with both the provision of physical infrastructure such as good quality roads and a stable supply of more intangible social infrastructure such as trust between villagers and the government, and trust between households from different villages.

User-based Water Allocation and Agricultural Water Use Efficiency:
A Case Study of Water User Associations in Minle County of Gansu
Province, Northwest China
Lei ZHANG, Nico Heerink, and Liesbeth Dries
Wageningen University

The competition for scarce water resources in China is becoming increasingly intense, and agriculture occupies a central place in meeting the challenge of balancing the competing needs. The production of food and other agricultural products claims a large and increasing part of surface water and groundwater. Because water use in many regions of China is not well managed, analyzing the allocation and management of water resources is of great importance.

This study aims to analyze the impact of changes in the institutional setup of user-based water allocation on efficiency of agricultural water use in an arid Chinese region. It starts with an overview and comparison of relevant alternative water allocation mechanisms, including public administered allocation, water markets, and user-based allocation. The empirical part focuses on user-based allocation mechanisms, applying common-pool resources governance as the theoretical framework. This framework builds on Agrawal (2001), which discusses institutional elements for assessing the sustainability of common-pool resource governance. The institutional elements include: (a) characteristics of resources, (b) nature of groups that depend on resources, (c) relationship between resource characteristics and group characteristics, (d) particulars of institutional regimes through which resources are managed, (e) relationship between resource system and institutional arrangements, (f) external forces and authorities such as markets, states, and technology.

The empirical analysis will examine to what extent each element varies over the different Water User Associations (WUAs) and how these differences affect the efficiency of agricultural water use by the WUA members. The data were collected via two surveys held in Minle County of Gansu Province, Northwest China. In these surveys, 30 randomly selected WUAs were interviewed for the years 2007 and 2009, respectively. The 2007 survey serves as a baseline survey to assess the situation before the start of a large-scale potato processing company in Minle County, while the 2009 survey can be used to assess the changes in water allocation to farm households and the institutional changes in WUAs that occurred after the start of the new factory.

The research contributes to the institutional economic analysis of common property and sustainable governance of water resources as an agricultural input.

Credit Rating and Access to Loans:
A Natural Experiment of Rural Credit Cooperative Association in
Dongtou County, Wenzhou City
Qunli ZHOU
Fudan University

People can use their social network in getting a guarantor to obtain secured loans, and they can also get credit loans by their credit rating. How does a formal institution such as the credit rating system affect individuals' access to finance? Does it replace informal institutions such as individuals' social network in getting financial aid?

Since 2007, the Rural Credit Cooperative Association in Dongtou County, Wenzhou City, has implemented a financial institutional innovation: evaluating farmers' credit and giving them some credit loans when needed. A committee constituted by the Loan Custom Manager and some officers in the village scores the farmers' credit according to their household assets, their personality, and the risk of their occupation. Farmers whose score is higher than a certain threshold can get a rank that varies from 1A to 5A, which means that using their signature they can get a credit loan no more than 10,000 Yuan to 50,000 Yuan when needed, accordingly. Because credit loans can be had more conveniently and at a lower borrowing interest rate, this institutional innovation has reduced the demand for secured loans which have a higher interest rate and must depend on the individual's social network to get a guarantor. So we may find that the role of informal institutions in getting financial aid has been partly replaced by the formal institution. But there may exist another possibility: since the leader of the village is very important during the evaluation, the social network is still important because the informal institution is embedded in the formal institution.

The two effects can be tested by contrasting the change before and after the score and credit process, which can be viewed as a natural experiment. We can analyze the effect of formal and informal institutions in helping people get financial aid and the lrelationship between them.