Are property rights enough?Re‐evaluating a big‐bang claim1

We investigate the claim made by proponents of the big‐bang strategy that the establishment of property rights in an economy in transition creates its own demand for the enforcement of laws to protect those rights. Our model contains a government engaging in activities to accomplish objectives that depend on public support for the enforcement of the rule of law and agents who interpret the level of activities of the government as indications of the government's intent to enforce the rule of law. Agents, using the level of government activities as an input to their decisions, choose whether to support the government's objectives. We establish conditions under which the level of activities chosen by the government maximizes its benefits, and simultaneously induces the constituency to support enforcement of the rule of law. These conditions provide a basis for the argument for the implementation of the big‐bang policy. When these conditions do not hold, however, we show that the level of activities that maximizes the government's benefits may have only a minor impact on support for the enforcement of the rule of law. Two characteristics play an important role in these conditions: the initial level of crime and the types of activities the government chooses to undertake. We present examples showing that the initial level of crime has the more dramatic effect on subsequent support for the rule of law.     

How Corporate Diversity and Size Influence Spinoffs and Other Breakups

In recent months, the list of large diversified companies that have decided they would be worth more as several smaller, focused companies has grown sharply. In many of these cases, it has been outside pressure from activist investors that has motivated these actions by management—and with some pretty favorable results. But what is driving these strategic actions and what is most important in determining whether breakups create value? To answer this fundamental questions, it is critical to decide whether large, diversified companies have a value recognition problem or a value creation problem. In this article, the authors present and try to integrate the findings of two separate but related research studies on business diversity and size with the aim of identifying their implications for corporate strategy and helping company executives create more value for their investors. The specific reasons for underperformance by large diverse companies vary greatly, but there are a number of potential problems discussed in this article, including organizational “distance,” capital allocation, human capital allocation, cross subsidies, and ineffective governance. Instead of waiting for activist investors to demand a breakup, executives of large diverse companies should be proactive in addressing the potential weaknesses of their organizations. Private equity firms understand how to make diversification work and many of today's executives could learn some valuable lessons from these firms. Large diverse businesses should embrace “Internal Capitalism,” a corporate culture and set of practices that emphasizes the importance of strategic decision‐making that is linked through continuous performance assessment to the corporate goals of boosting efficiency and sustainable growth.     

When adding a fuel efficient car increases an automaker's CAFE penalty

We derive the conditions that cause an automaker's Corporate Average Fuel Economy (CAFE) fine to increase when it sells an additional, fuel efficient car. Raising the CAFE standards would broaden the range of fuel economies that produce this effect. Copyright © 2005 John Wiley & Sons, Ltd.     

Peasant communes and factor markets in late nineteenth-century Russia

The peasant land commune was the emblematic institutional feature of agrarian Russian society before the Revolution of 1917. Economic historians have long blamed the commune for restricting household behavior in ways that contributed to Russia's economic “backwardness” by the late 19th century. Drawing on new household-level data collected from archival sources in Moscow province, this article provides the first microeconomic analysis of local factor markets and household behavior within the institutional context of the Russian peasant commune. The empirical evidence indicates that peasant households did have substantial flexibility when it came to allocating their land and labor holdings. In response to mortality shocks or lags in the communal adjustment of land, households engaged in land rentals and off-farm labor market transactions to improve upon suboptimal factor endowments. Although these findings do not imply that the resulting allocation of resources was fully efficient, they do illustrate how peasants made rational factor market transactions in a seemingly inhospitable institutional environment.     

THE ROLE OF FINANCIAL CAPITAL IN PRODUCTION

It is increasingly acknowledged that the financial structure of a firm is an important determinant of its production costs. This paper argues that the use of a firm's liabilities should be seen as a separate input in the production process. At the same time, the input of non-financial assets is limited to the value that is used up during the reference period. The paper elaborates on these ideas and shows their use in empirical work. It is concluded that the approach set out in this paper establishes a much closer relationship of general economic accounting and analysis to business economics.     

Agriculture and economic growth in Ethiopia: growth multipliers from a four-sector simulation model

Agriculture accounts for over half of Ethiopian GDP, yet 'he case for agriculture as a focus of economic growth strategies must rely on identifying a set of intersectoral linkages through which agricultural growth contributes to the growth of nonagriculture in the Ethiopian economy. This article develops a four-sector numerical simulation model of economic growth in Ethiopia which permits the calculation of macroeconomic growth multipliers resulting from income shocks to agriculture, services, modern industry, and traditional industry. The resulting growth multipliers are 1.54 for agriculture. 1.80 for services, 1.34 for modern industry, and 1.22 for traditional industry. These results depict an economy in which intersectoral linkages operate on a highly uneven basis. These limits are reflected in the wide disparity between sectoral growth multipliers and by substantial differences in the patterns ol their decomposition. The policy relevance of these findings relate, in part, to the distributional implications of growth in particular sectors. Poverty in Ethiopia is disproportionately rural. An income shock to agriculture is clearly the most progressive choice, indicating the need to highlight agricultural development in growth strategies for Ethiopia. Yet, the simulation results further indicate that doing so imposes relatively little trade off against total benefit. While a $1 service sector income shock generates $0.80 in indirect benefits, a $1 agricultural income shock still generates $0.54 in indirect gains-a somewhat smaller benelit, but one likely to make the greatest possible impact on poverty reduction.     

Ex ante analysis of the benefits of transgenic drought tolerance research on cereal crops in low-income countries

This article develops a framework to examine the ex ante benefits of transgenic research on drought in eight low-income countries, including the benefits to producers and consumers from farm income stabilization and the potential magnitude of private sector profits from intellectual property rights (IPRs). The framework employs country-specific agroecological–drought risk zones and considers both yield increases and yield variance reductions when estimating producer and consumer benefits from research. Benefits from yield variance reductions are shown to be an important component of aggregate drought research benefits, representing 40% of total benefits across the eight countries. Further, estimated annual benefits of US$178 million to the private sector suggest that significant incentives exist for participation in transgenic drought tolerance research.     

Optimised asset replacement strategy in the presence of lead time uncertainty

This paper develops an optimal replacement strategy for capital intensive equipment with long delivery lead time. The strategy is based on an extended version of the real options approach to repeated replacement decisions, in which the goal is to determine the operating cost and delivery lead-time conditions upon which a replacement should be ordered.The real options approach to capital replacement problems is superior to traditional net present value (NPV) approaches, as it values of the option to adapt decisions based on current (rather than predicted) system conditions. However, previous applications of the real options approach to repeated replacement have not considered the impact of long and uncertain lead times, and have therefore focused on when to replace rather than when to order. Delivery lead times are an important consideration in an expanding mining sector in which demand for heavy mobile equipment (HME) exceeds the capacity of suppliers to provide the equipment in a timely manner.The inclusion of a lead time element results in a decision with an “option” period and an “option-less” period. Simulations are used to demonstrate the improved outcome of real options based replacement strategies compared with those derived using a traditional NPV approach, both with and without lead times. Further the performance of the order placement strategy with different boundary conditions, bounded and reflecting, is explored. No appreciable difference in performance of these strategies was identified. The optimal order placement strategy incorporating delivery lead times is displayed on a simple chart which is accessible to fleet management personnel.