2022 Webworkshop: Abstracts



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Ownership Forms and the Effects Over Entry and Exit Decisions: A Comparative Analysis
Octavio Augusto D. de BARROS, Sandro Cabral, and Sérgio Lazzarini
Insper – São Paulo, Brazil

Strategy literature has long examined the effects of ownership on a wide variety of organization outcomes, including how varying ownership forms affect value capture by shareholders and value allocation to multiple stakeholders. However, there is scant discussion of ownership arrangements in which the stakeholders themselves participate in the decision-making process of the organizations while possessing critical decision rights, such as in cooperatives. In this paper, we extend this literature by comparing the cooperative form with for-profits and state-owned enterprises to understand how increased ownership by stakeholders affects the strategy of the organizations. We argue that, while the three organizational forms share commonalities in terms of governance structure, they are substantially different in terms of residual income and control rights in a way that affects both their strategic decisions and their ability to cope with stakeholders’ claims. For instance, in cooperatives, stakeholders are not just extrinsically benefited by the company depending on the preferences of shareholders and managers, but actually become part of the decision structure in a "one person one vote" system. Those stakeholders-owners have total clarity regarding their own preferences, and are usually not driven exclusively by pecuniary goals, but rather aim at objectives that are common to owners, employees, and the community. Therefore, cooperatives can be expected to focus more broadly on maximizing stakeholder value appropriation than other ownership forms. We test our hypotheses in the context of digitalization of credit lenders in Brazil to compare the entry and exit decisions of private and state-owned banks, and credit cooperatives. Consistent with theory, our findings show that, in comparison to other ownership arrangements, cooperatives are more focused on attending stakeholders’ demands, especially in the case of less enfranchised ones. Additional heterogeneity tests related to local vulnerability and robustness checks are also implemented and support the main results.

Family Ties: How Political Dynasties Shape Federal Transfers and Social Policies in Brazil
Universidade Federal de Pernambuco

In Floresta, an impoverished municipality of 30 thousand inhabitants that lies 437 km from the state capital, Recife, the electoral dispute for the mayoral office has turned into a protracted family feud. For most of its 120 years of existence, two families compete for political power. The violent rivalry between the Ferraz and Novaes families is famous throughout the state since 1913 for its bellicose and oftentimes bloody nature. At the time, this family situation took more than 20 lives. The back and forth of killings and aggression went so far that the State Congress called publicly for a truce between the families.

3.039 kilometers (around 1890 miles) separate Floresta (PE) from Florianópolis (SC), one of the wealthiest capitals in the country. The city mayor César Souza Júnior (PSD) had his homonymous father elected for the same legislature. In Maranhão, the Sarney family had its most influential figure - José Sarney - as president at the beginning of Brazilian democracy. The Sarney family has held a grip on state politics in Maranhão for several decades.

Political dynasties are political family groups who benefit in elections from different relatives who were or are in power (Dal Bó, Dal Bó, & Snyder, 2009) They are present in countries with different institutional and cultural characteristics, such as Japan (Asako, Iida, Matsubayashi, & Ueda, 2015), India (George & Ponattu, n.d.), Philippines (Labonne, Parsa, & Querubín, 2019; Mendoza, Jr, Venida, & Yap, 2012; Querubin, 2016) and Brazil (Bragança, Ferraz, & Rios, 2015).

My research project focuses on the Political Dynasties’ effects on federal resources and public outcomes. I expect that political families can stay in power for more time, get more federal money, and deliver better policies in their municipalities. I argue that dynastic mayors have more opportunities to raise political expertise and then are able to perform better policies.

Methodologically, I will measure dynasties in Brazil by data mining and scanning official documents from electoral candidates (2010-2018) that contain information about family ties. I employ a Regression Discontinuity Design to identify the causal effect of being a dynastic mayor on federal transfers allocation and policy outcomes.

Understanding the Evolution of Informal Water Markets in East Africa
Gina GILSON and Dustin Garrick
University of Oxford

Informal water markets play a vital and growing role in addressing water supply gaps amidst climate change and urbanization, particularly in the context of developing state capacity. They are of growing importance in Sub-Saharan Africa, where over 400 million people lack access to improved drinking water, and 4 of 5 workers are informally employed. Despite their proliferation, evidence is spread across disciplines and remains largely anecdotal, with observations that range from charitable community associations to extortionary cartels. We know surprisingly little about the types of informal water markets that exist, the social infrastructure that supports and sustains them, and the different pathways leading to equitable access or exploitation. This research project aims to shed light on patterns of informal water markets and the conditions under which they lead to better or worse outcomes. First, a literature review will draw on recent advances in polycentric theory to synthesize existing evidence across Sub-Saharan Africa and illustrate archetypes of informal water market institutions with diverse value chains, patterns of collective action, and types of co-production with the state. Second, an institutional analysis will shed light on the relative payoffs associated with different archetypes of informal water markets through a case study in Kisumu, Kenya. Finally, interview data will be combined with a review of documents from government actors, international development agencies, and non-profit organizations to reveal the stigma surrounding informal water supply and how dominant narratives have affected everyday water practices. Harnessing advances in institutional economics and polycentricity, the project provides analytical clarity on the institutional heterogeneity within the informal water sector and the potentials and pitfalls of co-production with the state. For academics, the research project offers a theoretical contribution to our understanding of how markets come to be, the social infrastructure that underpins them, and the role of entrepreneurs in altering the nature of goods and services. For policymakers and development organizations, it will provide timely insights for how to harness the benefits of informal water vending while mitigating their risks.

Trust and Dimensions of Democracy. Economic Analysis
University of Warsaw

The article inscribes a discussion on determinants and effects of social capital defined as the quantity and quality of social relations in a community. It aims to disentangle the interrelationship between different dimensions of democracy in a given country and the social trust characterizing its citizens. In particular, we address the following research questions:

what is the direction of the influence – do characteristics of democracy matter for the level of social trust OR does the level of the social trust determine the shape of democracy in a particular state?
for which countries the effect is the strongest?

The trust aspect of social capital is important from the economic perspective as it is linked to the trustworthiness of the social environment while making agreements. It creates bonds between people and facilitates cooperation and efficiency. What is more, trust in the institutional environment influences both individual and social outcomes, increasing a society's overall effectiveness in inter alia facilitating exchanges, lowering transaction costs, or encouraging collective management of resources.

In our paper, we focus on the relationship between trust and different dimensions of democracy i.e. the extent to which a political regime may be characterized as electoral, liberal, egalitarian, deliberative, or participatory democracy. The aforementioned classification is proposed in the V-Dem database.

The methodology used consists of a simultaneous equations model with the three-least squares estimator. The preliminary model is structured as follows:

trust_i = dimension of democracy_i + sex_i + age_i + age_i^2 + marital status_i + highest level of education_i + subjective wellbeing_i + employment status_i + religion_i + year_i + ε_i

dimension of democracy_i = trust_i + lnGDPpc_i + unemployment_i + life expectancy_i + year_i + ε_i

The model is estimated from a sample of respondents included in wave 7 of the World Values Survey conducted in the years 2017-2022 in 57 countries of the world.

Preliminary model results indicate the significant positive two-directional relationship between social trust and various dimensions of democracy. The effect is the strongest for the deliberative principle of democracy which focuses on the usage of media, hearings, panels, and other deliberative bodies during the decision-making process.

Highway Constructions Facilitated Income Growth When Accompanied
with Other Interventions
Fangzhou LIAN
Tongji University

Given the high costs, whether transportation infrastructure investments have the promising benefits of transforming economic activity and outcomes attracts increasing attention from policymakers and scholars. To better understand this question we estimate the effect of highway connections on income in the setting of China, which has constructed the largest highway networks in the world over the past decades. We combine geo-referenced data processing approaches with applied micro-econometrics methods. We construct, for the first time, large-scale Chinese highway network data in the 2010s, by processing extensive atlas information from multiple sources using geographic information system. We exploit a difference-in-differences framework, which compares counties connected to highways with counties that were scheduled but unconnected, to estimate causal effects. Using panel datasets drawn from both county yearbooks and nationally representative household survey data, we find that on average, highway connections increase income by about six percent; in counties that receive poverty-reduction interventions, the effect is significantly larger, which is ten percent; in counties that do not receive any interventions, the effect is milder. We also find that the effects on income appear to accumulate over time. Further analyses suggest that highway connections raise income via increased labor mobility and improved agricultural technology. Our findings highlight the complementarity between transportation infrastructure investments and other poverty-reduction efforts, providing important insights for global poverty-alleviation initiatives.

Building Loyalty through Personal Connections: Evidence from the Spanish Empire
Fundação Getulio Vargas - Rio de Janeiro

How do rulers manage to govern when they cannot implement policy themselves and have limited means to monitor and even communicate with their agents? The personal loyalties of high-ranking officials can help overcome or exacerbate agency problems. The Spanish Empire promoted links between colonial officials and their superiors in Spain and discouraged social ties between them and local elites. I use superiors' entries and exits as within-official shocks to connections to estimate their effect on promotions and performance. I find that connected ministers were more likely to be promoted and raised more revenue. On the other hand, ministers with more links to local elites collected less revenue. These patterns are explained by personal connections, defined as sustained in-person interactions during their early careers. I also validate the connections measure by showing that they predict endogenous friendships.

Nudging Toward Better Outcomes? 
A Case Study of the Slovak Pension System Reform
University of Economics in Bratislava

Behavioural sciences shed light on and help us to understand why investors follow irrational investment strategies that lead to losses and to identify ways of how investors can be motivated to adhere to more optimal financial asset management strategies. It has been argued that behavioural nudges represent relatively cheap ways of improving individuals’ decision-making, which have also been widely used by governments around the world to improve the decision-making of citizens.

In 2012, the Slovak parliament reformed the investment pillar of the pension system. As a result of the reform, in 2013, a default conservative investment strategy was passed, i.e., by the end of the first quarter of 2013, all pension savers’ investments had to be transferred to conservative portfolios. Pension savers had the option to opt out from the default strategy, however, they had to take action themselves and change their preferred investment allocation. Data shows that even after 9 years of the pension system reform, more than 50 % of all pension savers invest only in conservative portfolios. It is estimated that due to the conservative default investment strategy, pension savers lost a third of their savings compared to the baseline, no reform, scenario.

The main research question that this research will focus on is: Who doesn’t respond to imposed changes in the default investment strategy? The research aims to study the behaviour of individual investors enrolled in the investment pillar and factors – such as demographic characteristics, socio-economic characteristics, personality traits, risk aversion – that affect it.

The data used in the research will be collected by using a questionnaire and from the database of a selected Slovak pension fund. The questionnaire will aim to determine the demographic and socio-economic characteristics, personality traits (based on the Goldberg's Big Five framework), degree of risk aversion as well as investment decisions.

We expect that certain socio-demographic characteristics, personality traits and degree of risk aversion will significantly affect individual’s choice to opt-out from the default investment strategy. The findings will help us to understand the decision-making of individuals in a below-optimal setting, i.e., when the chosen investment strategy leads to sub-optimal outcomes.

Why Are Piles of Manure All Around Marginal Dairy Households Now?
Deepika YADAV
Indian Institute of Management - Ahmedabad

As of 2019, India is home to a population of 302.3 million bovines, making it the world's largest producer of bovine manure. Historically bovines were owned by large farmers, who also owned large tracts of land, which enabled them to practice crop-livestock mixed farming. The marginal farmers, on the other hand, could only manage access to young or dry cattle on bataya contracts. In these contracts poor households used to take care of the cattle on behalf of the owners and in return they got a proportion of the output (milk or meat) or share in profit at the time of selling.  In recent decades, this bovine ownership structure has got upended. Bovine ownership has got increasingly concentrated among marginal farmers while the large farmers have disengaged from dairying. But the average land holding for the two groups has remained static over the same period. These new ownership patterns have left large farmers searching for bovine manure to compost their fields, while the marginal farmers have surplus bovine manure but no land to apply it on. As a potential solution ‘informal manure markets’ have emerged at the village level, where marginal dairy farmers dominate as sellers while medium and large farmers are the buyers. This is a recent phenomenon and there have been no studies on the volume and terms of transactions in these markets. The present research aims to study the institutional arrangements around the working of these markets using the case study approach.

I expect variations in transaction costs (finding potential buyers and bargaining price) for different manure sellers based on their caste, gender, land holding, and bovine ownership. I hypothesize that the transaction cost for landless women manure sellers will be higher than other sellers because the opportunity cost of manure for them is low due to 1) no alternative use and 2) lack of space to manage manure. I will also use the IAD framework to identify the sources of transaction costs and their impact on the outcomes for different sellers. The present system of bovine management in India has many negative externalities, and this study will contribute to the scant literature on the same.

Do Autocrats Break Their Promises?
A Principal-Agent Problem with Limited Commitment
Andong YAN
University of California - Riverside

An autocratic ruler promises rewards to the subordinate officials in return for their unmonitored good performances. Due to the concentration of absolute power in the ruler's hands, the ruler has the temptation and ability to deny the repayments. Thus, the autocrat's credibility is a central issue in this principal-agent problem.

In this research, we develop a moral-hazard model under limited commitment to understand how the autocratic ruler builds a long-term agency with the subordinate officials, where the credibility of the autocrat is in doubt. Our model parametrizes the limited commitment environment with two variables, the probability of contract renegotiation and the cost of contract renegotiation. In other words, the ruler has a positive probability to be able to utilize the absolute power to renegotiate the contract with a positive cost.

These two parameters of the commitment environment are crucial to the solution of this principal-agent problem. When the cost of renegotiation is significantly higher than the hidden corruption collected by the official's abuse of power, the ruler would offer a contract that is renegotiation-proof, since keeping the promise will be cheaper than renegotiating. On the other side, when the ruler has a larger chance to renegotiate the contract, the payment will be front loaded to make the official feel secure in face of the likely renegotiation, and vice versa. While the ruler always has a positive probability to renegotiate the contract, he will only break his promise when the observed outcome implies a good performance by the official. This contract feature leads the official to abuse the power against the ruler’s will, which in turn increases the cost of the incentive plan that could deter the corrupt abuse of power.

Our work provides a benchmark for comparative studies of various historical autocratic regimes. As autocrats may have different commitment environments, our model provides insights into why autocratic regimes could have different political structures to ensure their agents’ collaboration and the proper functioning.

Institutions Meet S-Curve:
Product Innovation in the Drone Industry around Precision Agriculture
Dian YU
Carnegie Mellon University

How does product innovation evolve? Innovation theories take a “convergence” perspective, whereby the focus is on how a single standard becomes accepted. However, institutional theories suggest the possibility of a “divergence” perspective, whereby the focus is on how other standards can be legitimated and accepted. To make inroads into this question and theoretical tension, this paper examines how formal standards (regulative institutional factors), industry consortia (normative institutional factors), and knowledge providers (cognitive institutional factors) interact to differentially impact observed firm product features. The drone industry around precision agriculture is a heavily regulated yet nascent market that serves as a useful context to explore the product innovation process. I test the proposed model of product innovation using panel data on new introductions of 464 UAS platforms targeted at precision agriculture sector released between 2000 to 2021. While regulatory standards do lead to product innovation converge, local institutional carriers play a key role in either enhancing or acting against such convergence. Firms located near industry consortia tend to experiment less and align with the emerging standard whereas firms located near knowledge providers tend to experiment more and diverge from the emerging standard. This piece presents a new more holistic perspective on the evolution of product innovation that combines our preexisting perspectives on innovation with emerging ones from institutional theory, namely that around entrepreneurship. This also has managerial implications. While accounting for regulations is crucial, managers may find looking at how local institutional carriers respond to standards trends important in how they modulate product design choices.

Captured by Standards? An Empirical Study of Technical Standards-Setting During Market Transition
Meiyang ZHANG, Fan Zhang
Xiamen University

By providing common basis on which interconnected products and services operate, technical standards play a critical role in the innovation and commercialization of the related technologies. Firms’ involvement in the standards-setting process thus has the potential to promote corporate innovation by securing larger market shares. The market power captured through standards-setting, however, may also induce the standards setter to sit on their laurels and enjoy their monopoly profits, thus hampering effort to invest for future innovation.

To empirically examine the two possibilities discussed above in the setting of China’s transition economy, we exploit the involvement of listed companies in the state standards-setting process and its consequences. Specifically, this paper studies the effects of firms' being standards-setting participants on innovation and performance using a staggered DID approach. On the one hand, standards-setting involvement is found to have a negative impact on corporate innovation, resulting in a 17.9% decrease in invention fillings. The finding is robust to a series of tests, including alternative model specifications, alternative core measures, and the propensity score matching procedure. And the effects are heterogeneous and depend on the characteristics of the rent-seeking opportunities. In particular, the negative impact of standards-setting involvement on innovation holds for firms participating in standards-setting involving more patents, firms participating in standards-setting with fewer competing standards, and firms concentrating in the domestic market, suggesting that standards-setting involvements could impede innovation through regulatory capture. On the other hand, there is a positive effect of standards-setting involvement on corporate profits, which flow primarily to shareholders via dividend distribution.

Overall, our findings provide new empirical evidence on how participants in an innovation regulatory process seem to have captured the regulatory process and then have succumbed to its consequences, resulting in less rather than more technological innovation. Yet, remaining issues to be addressed include the following: Is the capture of industry participants a more general or even an inevitable phenomenon? Has China's market transition process influenced the country’s standards-setting processes? And if so, how?

Keywords: Innovation, Standards-setting process, Regulatory capture

Multi-Task Incentives in Bureaucracy: Theory and Evidence from China
Chenggang Xu, Albert Bo Zhao, Ziao ZHAO
Stanford University, Nankai University, University of Wisconsin - Madison

We provide an institutional explanation for the following stylized facts: (1) why China has been successful in promoting economic growth since its reform-and-opening-up, but the speed of growth is slowing down in recent years; (2) why many problems, such as pollution and other social issues, arise simultaneously, even if not intended. The insight is that China's governance structure is a mixture of top-down personnel control and yardstick competition among local officials. When the indicator of local officials' performances is single, well-defined, and easily measured, yardstick competition creates high incentives. When the indicator of local officials' performances involves multiple targets, incentives get reduced and distorted. And local officials shift efforts to more easily measured targets. Our theory extends Holmstrom and Milgrom (1991)'s multitask principal-agent model to a multitask-multi-agent model. We argue that economic growth and environmental protection are two major tasks assigned to local officials since 2012, estimate local officials' efforts on these two tasks, and test our theory's predictions. The empirical evidence is supportive.