Evaluating investment projects in the presence of sectoral linkages1

In this paper we develop a framework to assess the economic impact of foreign investment projects. If investment projects interact with other industries in the host economy, either by buying inputs locally or by selling their own product to local downstream firms, they can create sectoral linkages. The expansion of upstream and downstream industries can feed back to the project's own industry leading to a further expansion of the local industry. We study the circumstances under which investment projects lead to the creation of sectoral linkages and characterize the factors that determine the project's welfare impact. We link analytical findings to case studies undertaken for the EBRD.     

Ex Post Inefficiencies in a Property Rights Theory of the Firm

Private information can lead to inefficient bargaining betweenmanagers. I develop a property rights theory of the firm toanalyze the optimal ownership structure that minimizes thisbargaining inefficiency. I first show that a change in the ownershipstructure that reduces the managers' aggregate disagreementpayoff increases the probability that they realize efficienttrades, but also increases the cost of disagreement and canlead them to trade "too often." I then show that joint ownershipis optimal if the managers' expected gains from trade are largeand that either integration or nonintegration is optimal ifthe expected gains from trade are small.     

Relational delegation

We analyze a cheap talk game with partial commitment by the principal. We first treat the principal's commitment power as exogenous and then endogenize it in an infinitely repeated game. We characterize optimal decision making for any commitment power and show when it takes the form of threshold delegation—in which case the agent can make any decision below a threshold—and centralization—in which case the agent has no discretion. For small biases, threshold delegation is optimal for any smooth distribution. Outsourcing can only be optimal if the principal's commitment power is sufficiently small.     

Labor market reforms, job instability, and the flexibility of the employment relationship

We endogenize separation in a search model of the labor market and allow for bargaining over the continuation of employment relationships following productivity shocks to take place under asymmetric information. In such a setting separation may occur even if continuation of the employment relationship is privately efficient for workers and firms. We show that reductions in the cost of separation, owing for example to a reduction in firing taxes, lead to an increase in job instability and, when separation costs are initially high, may be welfare decreasing for workers and firms. We furthermore show that, in response to an exogenous reduction in firing taxes, workers and firms may switch from rigid to flexible employment contracts, which further amplifies the increase in job instability caused by policy reform.