Bounded governance within extended order: The Confucian advantage of synergy under generalized constitutional rules

A constitutional explanation of the economic dynamism of the East Asian Confucian economies is proposed. The main hypothesis is that the synergy between the extended order of generalized rules, first introduced by Western civilization, and the bounded governance of Confucian societies has produced a comparative cultural and institutional advantage for the five tigers in East Asia. As a pure form, the extended order, represented in Western society by a system of private property rights, a system of impersonal and generalized markets and a formal-rational system of law and administration, is far more efficient than the bounded governance of Confucian societies in the East Asia, which is characterized by the particularistic human relations and familistic, clannish, and other forms of personal ties and connections. Nevertheless, once a linkage to the extended order is established—overcoming the limits of personal exchange—Confucian ethics can support the bounded governance structures of clans, networks, communities, and familistic corporations that are effective in governing those complex tasks in which property rights are difficult to divide and allocate, individual performance is difficult to measure, and complete contract is either difficult to make or hard to enforce.     

Corporate Restructuring in Japan Part I: Can M‐Form Organization Manage Diverse Businesses?

The purpose of this paper is to examine the recent organizational restructuring in Japan in the framework of organizational economics, assuming that the product/market portfolio of the firm is fixed. How does a firm set about organizing its internal divisions? I first summarize some stylized facts on corporate diversification strategy and multi‐divisional (M‐form) organization in large Japanese firms from different perspectives. I then analyse the problem of choosing an organizational form. In particular, I argue that, precisely because of its related diversification, the multi‐business Japanese firm adopting the M‐form finds it difficult to differentiate its diverse businesses internally.     

Market thickness,sunk costs,productivity, and the outsourcing decision: an empirical analysis of manufacturing firms in France

Abstract This paper presents an empirical analysis of outsourcing behaviour by French manufacturing industries. It focuses on the effects of market thickness, sunk costs, and the productivity of firms on the outsourcing decision. I estimate a dynamic probit model where outsourcing decision is linked to past outsourcing behaviour. The results show that outsourcing is a persistent strategy adopted by large firms and suggest the presence of significant sunk costs associated with outsourcing. The results also show that market thickness reduces search costs and enhances the establishment of outsourcing relationships.     

Ownership,Access, and Sequential Investment

We extend the property‐rights framework to allow for a separation of the ownership rights of access and veto and for sequential investment. Parties investing first do so before contracting is feasible. It is possible, however, that parties investing second can share (at least some of) their investment costs. Along with this cost‐sharing effect, the incentive to invest is affected by a strategic effect generated by sequential investment. Together these effects can overturn some of the predictions of the property‐rights literature. For example, the most inclusive ownership structure might not be optimal, even if all investments are complementary.     

Regulating Availability with Demand Uncertainty

Abstract. I evaluate a new German regulation that requires retail discounters to guarantee the availability of their products in bargain sales. The regulation is meant to prevent loss leaders. Retailers undermine the regulation's rationale by claiming that rationing is due to demand uncertainty. This paper shows that under demand uncertainty the regulation has ambiguous welfare effects. Effectively, it raises production, which, under imperfect competition, tends to be beneficial. However, the regulation overshoots and decreases welfare if it requires availability for a state of high demand that is relatively unlikely. In this case more sophisticated regulation is required.     

How does employment protection legislation influence hiring and firing decisions by the smallest firms?

This paper examines the impact of employment protection legislation (EPL) on hiring decisions by own-account workers and firing decisions by very small firms (one to four employees). Using data from the EU-15 countries, our results show that the strictness of employment protection legislation is negatively related to both these types of decisions, and hence, to labour mobility among the smallest firms. This new evidence may be useful for governments aiming to create a more enabling macro-environment for employment and productivity growth.     

Optimal limited authority for principal

This article studies a principal-agent problem where the only commitment for the uninformed principal is to restrict the set of decisions she makes following a report by the informed agent. We show that an ex ante optimal equilibrium for the principal corresponds to a finite partition of the state space, and each retained decision is ex post suboptimal for the principal, biased toward the agent?s preference. Generally an optimal equilibrium does not maximize the number of decisions the principal can credibly retain. Compared to no commitment, limited authority improves the quality of communication from the agent. As a result, it can give the principal a higher expected payoff than delegating the decision to the agent.     

A general equilibrium analysis of software development: Implications of copyright protection and contract enforcement

We develop a general equilibrium model to study the implications of a legal environment on the organization of software production. We show that contract enforcement determines the organizational mode (i.e., in-house versus outsourcing) of customized software development while copyright protection affects both packaged software as well as customized software development. We obtain some testable results: when copyright protection is weak, only customized software will be developed; when copyright protection is strong, both customized software and packaged software will be developed; environment changes in one software market affect the equilibrium in the other software market.     

More bits – more bucks? Measuring the impact of broadband internet on firm performance

The paper provides empirical evidence for the causal impact of broadband Internet on firms’ labour productivity and realised process and product innovations. The analysis refers to the early phase of DSL expansion in Germany from 2001 to 2003, when roughly 60% of the German firms already used broadband Internet. Identification relies on instrumental variable estimation taking advantage of information on the availability of DSL broadband at the postal code level. The results show that broadband Internet has no impact on firms’ labour productivity, whereas it exhibits a positive and significant impact on their innovation activity.     

Rent Seeking Behavior in Transition Countries: The Case of Romania

This paper points out, in the changing institutional setting of transition in Romania, Some relevant factors influencing economic actors to behave in a way that pushes them to devote resources to unproductive goals, rather than to embark on activities that add economic and social value. The theoretical insights offered in the literature of rent seeking are applied to the issues of transition. A mathematical model of a rent seeking economy is presented, analyzing the influence of interest groups activity on the overall income of the economy. Some examples of rent seeking behavior that severely hamper the economic efficiency are illustrated for the case of Romania. The conclusion is that, in appreciating the progress in transition, the reduction in rent seeking is an important factor to be taken into consideration.     

Environmental regulation of technically inefficient firms

This paper presents a model in which a technically inefficient firm is responsible for the emissions of pollutants. We derive second-best regulatory schemes (tax and quota) assuming that the firm’s technical efficiency is unknown to the regulator.     

Testing theories with learnable and predictive representations

We study the problem of testing an expert whose theory has a learnable and predictive parametric representation, as do standard processes used in statistics. We design a test in which the expert is required to submit a date T by which he will have learned enough to deliver a sharp, testable prediction about future frequencies. We show that this test passes an expert who knows the data-generating process and cannot be manipulated by a uninformed one. Such a test is not possible if the theory is unrestricted.     

In-house competition, organizational slack, and the business cycle

Multiplant firms pit their facilities against each other for production assignments. The present paper studies the consequences of this practice in a model where production is limited by capacity constraints and asymmetric information allows facilities to accumulate slack. It shows the amount of slack per unit of output to be pro-cyclical. Indeed, as capacity constraints become more acute in economic booms, the power of in-house competition for quota assignments is reduced and slack per unit of output increases, while the opposite is true in downturns. Moreover, in downturns firms may use higher cost facilities even when lower cost plants are not running at capacity since this boosts X-efficiency in low-cost plants.     

Inflation, price dispersion, and market structure

In this paper, we use a novel data set containing prices from bazaars, convenience stores, and supermarkets in Istanbul to re-examine the relationship between price dispersion and inflation. Although existing evidence is mixed, we find positive and significant relationships between dispersion, on the one hand, and lagged dispersion and unexpected product-specific inflation on the other. We also find evidence that dispersion is initially decreasing in anticipated aggregate inflation but is eventually increasing. Finally, average price duration and dispersion are lowest in the bazaar. This is intuitive, since menu and search costs should be minimal in that market structure.     

Monopolistic competition and non-neighboring-goods

Summary This paper studies price games played by a continuum of differentiated producers who face demands generated by additively separable preferences exhibiting a non-neighboring goods property. The examples of exact equilibria show that an asymmetric Chamberlian outcome is compatible with nonzero profits for nonmarginal firms and also with constant average costs, contrary to long sustained views. The paper tries also to short out the structure behind this class of examples and identify as general features the presence of nonperfectly elastic demands facing individual firms and the existence of an approximate Chamberlinian equilibrium.I am indebted to J. Ostroy for very helpful comments and to L. Jones, P. Romer and W. Zame for several conversations.     

Non-constant discounting in continuous time

This paper derives the dynamic programming equation (DPE) to a differentiable Markov Perfect equilibrium in a problem with non-constant discounting and general functional forms. Beginning with a discrete stage model and taking the limit as the length of the stage goes to 0 leads to the DPE corresponding to the continuous time problem. The note discusses the multiplicity of equilibria under non-constant discounting, calculates the bounds of the set of candidate steady states, and Pareto ranks the equilibria.     

Do people tip strategically,to improve future service? Theory and evidence

Abstract.  A central question about tipping is whether people tip strategically, to improve future service, or only because tipping is a social norm. I present a theoretical model that incorporates psychological utility associated with tipping (because it is a social norm) and allows tipping to be motivated also by future service considerations. The model predicts that if future service is a reason for tipping, the sensitivity of tips to service quality should be higher for repeating customers than for non-repeating ones. Surveys of 597 restaurant customers are analysed and suggest that future service is not a reason for tipping.     

The strategy of manipulating joint decision-making

We study a model of strategic persuasion based on the theory of cheap talk, in which a better-informed agent manipulates two decision-makers’ joint decision on alternative proposals. With the heterogeneity of two decision-makers’ value of the outside option, only the decision-maker with the better outside option is critical in determining whether communication is truthful, overselling, or ineffective.