Hardened Budgets and Enterprise Restructuring: Theory and an Application to Romania

We identify the presence of soft budgets and analyze their impact on enterprise restructuring in Romania over the initial transition period. A simple analytical framework is developed to show that hardened budget constraints foster rationalization of costs but not new investment. The latter requires availability of external financing. The model emphasizes the importance of the credibility of hardened budgets and the empirical findings are consistent with its predictions. Using a sample of over 4000 Romanian enterprises from 1992 to 1995, we show that hardened budget constraints induce labor shedding. However, there is no evidence of new investments. J. Comp. Econ., December 2001, 29(4), pp. 749–763. University of Sienna, Central European University, and CEPR; and World Bank and CEPR. © 2001 Elsevier ScienceJournal of Economic Literature Classification Numbers: G32, G34.     

Does a Switch of Budget Regimes Affect Investment and Managerial Discretion of State-Owned Enterprises? Evidence from Italian Firms

We investigate the investment decisions of Italian state-owned enterprises (SOEs) across budget constraint regimes and carry out a natural experiment that exploits a regime switch in 1987. Drawing on the theory of capital market imperfections, we apply an empirical framework for investment analysis to a panel of manufacturing SOEs in competitive industries. We identify parallels between SOEs and widely held, quoted companies afflicted by agency problems, managerial discretion, and overinvestment. We argue that, in the case of SOEs, the soft budget regime increases managerial discretion, facilitates collusion with vote-seeking politicians, and results in wasteful investment. Consistent with our predictions, we find that the regime switch disciplines SOE's investment behavior. Following a hardening of the budget constraint, managers lose discretion to indulge in collusion and overinvestment. J. Comp. Econ., June 2002 30(4), pp. 787–811. London School of Economics and Political Science, Houghton Street, London WC2A 2AE, United Kingdom; and CERIS–CNR, Institute for Economic Research on Firms and Growth, National Research Council, Via Avogadro, 8, 10121 Turin, Italy. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: E32, G31, G32, L32, M40.     

Rent Seeking and Government Ownership of Firms: An Application to China''s Township–Village Enterprises

Using its control of regulated inputs, a government agency extracts rents from a manager who undertakes an investment. Such government rent-seeking activity leads to a typical hold-up problem. Government ownership serves as a second-best commitment mechanism, through which the government agency will restrain itself from the rent-seeking activity and may even offer the manager assistance in the form of tax breaks and subsidies. This mechanism works at a cost, however, as government ownership also compromises ex post managerial incentives and creates distortion in resource allocation. Nevertheless, government ownership Pareto dominates private ownership under certain conditions. These conditions correspond to a host of stylized empirical observations concerning local-government-owned firms, i.e., township–village enterprises, during China's transition to a market economy.J. Comp. Econ., June 2002 30(4), pp. 787–811. Department of Economics, University of Illinois at Urbana–Champaign, 328 David Kinley Hall, Urbana, Illinois 61801. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: D23, D72, L33.     

Privatization Methods and Productivity Effects in Romanian Industrial Enterprises

Comprehensive panel data on privatization transactions and labor productivity in Romanian industrial corporations are used to describe the postprivatization ownership structure and to estimate the effect of Romania's diverse privatization policies on firm performance. The econometric results show consistently positive, highly significant effects of private ownership on labor productivity growth; the point estimates imply an increased 1.0 to 1.7% growth for a 10% rise in private shareholding. The strongest estimated impacts are associated with sales to outside blockholders; insider transfers and mass privatization are estimated to have significantly smaller, although still positive, effects on firm performance. J. Comp. Econ., December 2002, 30(4), pp. 657–682. Upjohn Institute for Employment Research, Central European University; and Budapest University of Economic Sciences, Central European University. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: G32, G34, L32, L33, P20, P31.     

Share Ownership and Employee Attitudes: Some Evidence from China''s Postprivatization Rural Industry

In this paper, we report the impacts of share ownership on employee attitudes in China's privatized rural industries based on a survey administered in the Provinces of Jiangsu and Shandong. Our results indicate that, in general, employee shareholders have higher levels of job satisfaction, perceive greater degrees of participation in enterprise decision-making, display stronger organizational commitment, and have more positive attitudes towards the privatization process than nonshareholders in privatized firms. J. Comp. Econ., June 2002 30(4), pp. 812–835. Department of Economics, University of Winnipeg, Winnipeg, Manitoba, Canada; Economics Program, University of Northern British Columbia, Prince George, British Columbia, Canada; and Department of Economics, University of British Columbia, Vancouver, British Columbia, Canada. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: P3, P2, J5.     

Evolution in Finitely Repeated Coordination Games

I apply a version of Kandori et al. (1993, Econometrica, 61, 29–56) and Young's (1993, Econometrica, 61, 57–84) evolutionary dynamic to finitely repeated coordination games. The dynamic is modified by allowing mutations to affect only off path beliefs. I find that repetition within a match leads agents to sacrifice current payoffs in order to increase payoffs in later stages. As a consequence, evolution leads to (almost) efficiency. Journal of Economic Literature Classification Number: C79.     

Relative Living Standards in New Market Economies: Evidence from Central Asian Household Surveys

We examine household data from the Central Asian successor states to the Soviet Union to analyze how living standards are determined in newly established market economies. Three variables, namely location, children, and university education, are consistently significant across all four countries studied and play the largest role in determining household expenditure. The first two are of special significance to Central Asia, with its relative economic backwardness and high birth rate, but the importance of high-level general-purpose education appears to be a ubiquitous but underappreciated factor. Higher returns to education were expected in a market economy, but few observers distinguish between types of education; in the shift from central planning people with high-level general-purpose education have been best able to take advantage of new opportunities, while narrower technical education, by contrast, has left many with obsolete skills yielding zero returns in the market. J. Comp. Econ., June 2002 30(4), pp. 683–708. Department of Economics, Vanderbilt University, Nashville, Tennessee 37235; and School of Economics, University of Adelaide, Adelaide, South Australia 5005, Australia. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: D1, D31, O12, P36.     

Information, Incentives, and Option Value: The Silicon Valley Model

This paper analyzes the Silicon Valley model as a novel economic institution in the domain of technological product system innovation. We analyze the informational relationship as well as governance relationships between venture capitalists and a cluster of entrepreneurial firms. The informational conditions that make the Silicon Valley model efficient are identified, leading to an understanding of the significance of standardized interfaces, modularization, and information encapsulation. We then examine the governance/incentive aspect by integrating the models of Aoki (Towards a Comparative Institutional Analysis, Cambridge, MA: MIT Press, 2001) and Baldwin and Clark (Design Rules—Vol. 1: The Power of Modularity, Cambridge, MA: MIT Press, 2000). The paper concludes by evaluating the applicability of the model to other localities and industries. J. Comp. Econ., December 2002, 30(4), pp. 759–786. Department of Economics, Stanford University, Stanford, California 94305, and RIETI, 1-3-1 Kasumigaseki, Chiyoda-ku, Tokyo 100-0013, Japan; and Faculty of Economics, Toyo University, 5-28-20 Hakusan, Bunkyo-ku, Tokyo 112-8606, Japan. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: D21, L23, O32, P51, P52.     

Projecting soviet energy requirements using a vintage capital model

A Solow-type vintage capital model with capital utilization is used to estimate the long-term average embedded rate of improvement in energy efficiency of Soviet fixed-capital commissionings: 2.6% per year. The results are combined with planned Soviet capital stock growth to forecast cap Soviet energy requirements through 1990. The implied Soviet capital utilization goals call for greater energy savings than have been achieved in the past. The results also identify an upper bound for rates of hidden inflation contained in Soviet capital commissionings data. It appears an estimate such as S. Cohn's 1% (Soviet Stud. 33, 2:269–299, 1981) is far more likely than A. Nove's 6 to 7% (Soviet Stud. 33, 1:142–145, 198 1).     

Substantive Rationality and Backward Induction

S. Modica and A. Rustichini (1994, Theory and Decision37, 107–124) provided a logic for reasoning about knowledge where agents may be unaware of certain propositions. However, their original approach had the unpleasant property that nontrivial unawareness was incompatible with partitional information structures. More recently, Modica and Rustichini (1999, Games Econ. Behav.27, 265–298) have provided an approach that allows for nontrivial unawareness in partitional information structures. Here it is shown that their approach can be viewed as a special case of a general approach to unawareness considered by R. Fagin and J. Y. Halpern (1988, Artificial Intelligence34, 39–76). Journal of Economic Literature Classification Numbers: D80, D83.     

Propping and tunneling

In countries with weak legal systems, there is a great deal of tunneling by the entrepreneurs who control publicly traded firms. However, under some conditions entrepreneurs prop up their firms, i.e., they use their private funds to benefit minority shareholders. We provide evidence and a model that explains propping. In particular, we suggest that issuing debt can credibly commit an entrepreneur to propping, even though creditors can never take possession of any underlying collateral. This helps to explain why emerging markets with weak institutions sometimes grow rapidly and why they are also subject to frequent economic and financial crises. Journal of Comparative Economics 31 (4) (2003) 732–750.     

The Effects of Market Liberalization on the Relative Earnings of Chinese Women

In this paper, we explore the effects of differences in labor market institutions and the degree of market liberalization on the size and composition of gender wages gaps in China's urban labor markets. We use enterprise-ownership type, enterprise age, and workers' methods of finding employment as proxies for the extent of market liberalization. We find both the size of the wage gaps and the proportion of the gap left unexplained by differences in observed characteristics largest in the most liberalized joint-venture sector and smallest in the least liberalized state sector. We next investigate the effects of differences in the wage structure on the gender wage gaps. We find that differences in the wage structure, in general, and the degree of wage dispersion, in particular, are extremely important in accounting for the larger wage gaps in the joint-venture and collective sectors relative to the state-owned sector. J. Comp. Econ., June 2002 30(4), pp. 709–731. Department of Economics, Bates College, Lewiston, Maine 04240. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: Numbers: J16, J31, J71, O15, O53, P23.     

Probability Logic for Type Spaces

Using a formal propositional language with operators “individual i assigns probability at least α” for countably many α, we devise an axiom system which is sound and complete with respect to the class of type spaces in the sense of Harsanyi (1967–1968, Management Science, 14 159–182). A crucial inference rule requires that degrees of belief be compatible for any two sets of assertions which are equivalent in a suitably defined natural sense. The completeness proof relies on a theorem of the alternative from convex analysis, and uses the method of filtration by finite sub-languages. Journal of Economic Literature Classification Numbers: D80, D82.     

The Role of Absolute Continuity in “Merging of Opinions” and “Rational Learning”

D. Blackwell and L. Dubins (1962, Ann. Math. Statist.38, 882–886) showed that opinions merge when priors are absolutely continuous. E. Kalai and E. Lehrer (1993, Econometrica61, 1019–1045) use this result to show that players in a repeated game eventually play like a Nash equilibrium. We provide an alternative proof of merging of opinions that clarifies the role of absolute continuity while casting doubt on the relevance of the result. Persistent disagreement, the opposite of merging, allows the construction of a sequence of mutually favorable “bets.” By a law of large numbers, both agents are certain they will win these bets on average. This certain disagreement violates absolute continuity. Journal of Economic Literature Classification Numbers: C11, C69, C72, D83.     

Evolution and Mixed Strategies

Selten (1980, J. Theoret. Biol., 84, 93–101) showed that no mixed equilibria are evolutionarily stable when players can condition their strategies on their roles in a game. Alternatively, Harsanyi's (1973, Int. J. Game Theory, 2, 1–23) purification argument implies that all mixed equilibria are approximations of strict, and hence evolutionarily stable, equilibria of games with slightly perturbed payoffs. This paper reconciles these results: Approximations of mixed equilibria have high invasion barriers, and hence are likely to persist, when payoff perturbations are relatively important and role identification is relatively noisy. When payoff perturbations are unimportant and role identification is precise, approximations of mixed equilibria will have small invasion barriers and are unlikely to persist. Journal of Economic Literature Classification Numbers: C70, C78.     

Urban Demand for Edible Oils and Fats in China: Evidence from Household Survey Data

Using urban household-level survey data from 1992 to 1998, we provide estimates of final demand for edible vegetable oils and animal fats in three regions of China based on an incomplete demand system. For each region, the demand for the major staple oil is price inelastic. The aggregate demand for nonstaple and condiment oils is more responsive to price changes and is elastic in some cases. All edible oils have positive income elasticity, but smaller than one. The share of animal fat in total fat and oil consumption is decreasing with rising income. Older and smaller households exhibit larger per-capita consumption of oils and fats. Exact measures of urban consumer welfare losses associated with trade restrictions on vegetable oil imports indicate that these urban consumers suffer a significant surplus loss as high as $679.19 million in 1998 U.S. dollars. J. Comp. Econ., December 2002, 30(4), pp. 732–753. Department of Economics and Center for Agricultural and Rural Development, Iowa State University, Ames, Iowa 50011-1070; and Institut National de Recherche Agronomique Paris-grignon 75231 Paris, France. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: Q18, D12, Q17, O18.     

Optimality and Robustness of the English Auction

In Milgrom and Weber's (1982, Econometrica50, 1089–1122) “general symmetric model,” under a few additional regularity conditions, the English auction maximizes the seller's expected profit within the class of all posterior-implementable trading procedures and fails to do so among all interim incentive-compatible procedures in which “losers do not pay.” These results suggest that appropriate notions of robustness and simplicity which imply the optimality of the English auction for a risk-neutral seller must impose “bargaining-like” features on the set of feasible trading mechanisms. Journal of Economic Literature Classification Numbers: D44, D82.     

A Proof of Calibration via Blackwell's Approachability Theorem

Over the past few years many proofs of the existence of calibration have been discovered. Each of the following provides a different algorithm and proof of convergence: D. Foster and R. Vohra (1991, Technical Report, University of Chicago), (1998, Biometrika85, 379–390), S. Hart (1995, personal communication), D. Fudenberg and D. Levine (1999, Games Econ. Behavior29, 104–130), and S. Hart and A. Mas-Colell (1997, Technical Report, Hebrew University). Does the literature really need one more? Probably not. But the algorithm proposed here has two virtues. First, it only randomizes between two forecasts that are very close to each other (either p or p + ε). In other words, the randomization only hides the last digit of the forecast. Second, it follows directly from Blackwell's approachability theorem, which shortens the proof substantially. Journal of Economic Literature Classification Numbers: C70, C73, C53.     

Rational Choice and the Condorcet Jury Theorem

In a recent paper, Austen-Smith and Banks (1996,Amer. Polit. Sci. Rev.90, 34–45), criticize the current literature on the Condorcet jury theorem as neglecting the behavioral underpinnings of decision-making. They leave open the question whether allowing mixed strategies would sustain the conclusions of the Condorcet jury theorem. In this paper, it is shown that these conclusions can hold in equilibrium. In other words, “a rational choice foundation for the claim that majorities invariably ‘do better’ than individuals” is derived. (Journal of Economic LiteratureClassification Number: D72.