optimal incentive schemes with many agents the grossman hart principal agent model of moral hazard is extended to the multiple agent case to explore the use of relative performance in optimal incentive contracting under the assumption that the principal chooses incentive schemes to implement agent actions as nash equilibria necessary and sufficient conditions are derived for the optimality of independent contracts of rank order tournaments and for attainability of the first best in this context the relation of the principal s welfare to the correlation between the underlying randomness in outputs of different agents is also investigated finally some problems with the nash equilibrium implementation assumption are discussed in this paper we extend the grossman hart analysis of the principal agent problem to a multiple agent setting in this version of the problem a risk neutral principal is assumed to observe the output or a performance index for each risk averse agent the output of any agent depends on a privately observable action chosen by the agent and an exogenous random variable the realization of which is not observed either by the principal or by the agent before choosing its action we especially focus attention on the role of relative performance evaluation in optimal incentive contracts and the way this depends on properties of the underlying production technology and the joint distribution of the random variables affecting the outputs of different agents in section 2 of the paper we consider the principal s problem of finding an optimal incentive scheme and an action tuple for agents subject to the constraint that the latter be implemented as a nash equilibrium between agents by the chosen incentive scheme where agents must attain at least their reservation utilities a characterization of optimal incentive schemes is derived analogous to the grossman hart characterization for the single agent problem this characterization is then utilized to find sufficient and generically necessary conditions for a optimal contracts for any agent to be independent of the performance of other agents and b optimality of rank order tournaments where payments depend solely on ordinal comparisons of output across agents we then describe a necessary and sufficient condition for the principal to extract maximum advantage from relative performance clauses i e achieve the first best level of expected utility in the multiagent situation an implication of this result is that under fairly weak conditions perfect correlation in the underlying production uncertainties for different agents enables the principal to attain the first best if and only if sufficiently heavy penalties can be inflicted on agents we then enquire what happens in intermediate cases of non perfect correlation it turns out that while in general the principal s welfare is a continuous function of the correlation coefficient it is not always nondecreasing in the latter because the correlation coefficient is not a general measure of association between two random variables but rather a measure of linear association between them

risk taking and taxation an alternative perspective abstract the analysis of risk taking and taxation has almost invariably been in a portfolio choice framework this paper presents the alternative perspective of an occupational choice framework where risk taking involves the additional element of discrete choice between safe and risky activities it is shown that the specification of equilibrium must of necessity have a general equilibrium character in this setting the paper develops rules for government intervention in the market equilibrium and analyses the effects of taxation on risk taking

a general equilibrium theory of firm formation based on individual unobservable skills abstract a model of firm formation is built along the lines of knight 1921 contrary to kihlstrom and laffont 1979 the individuals are risk neutral but have different productive efficiencies we suppose that the individuals who are the more efficient workers are also the more efficient entrepreneurs each agent chooses the activity which gives her the larger expected income in equilibrium the more efficient people become entrepreneurs and under a special kind of increasing returns to scale assumption this is also what is implied by efficiency considerations however we show that the equilibrium number of entrepreneurs is always larger than the pareto optimal one a simple uniform lump sum tax on firms together with redistribution of the tax revenue to workers is nevertheless sufficient to restore efficiency

occupational choice and the process of development this paper models economic development as a process of institutional transformation by focusing on the interplay between agents occupational decisions and the distribution of wealth because of capital market imperfections poor agents choose working for a wage over self employment and wealthy agents become entrepreneurs who monitor workers only with sufficient inequality however will there be employment contracts otherwise there is either subsistence or self employment thus in static equilibrium the occupational structure depends on distribution since the latter is itself endogenous we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long run effects in one case the economy develops either widespread cottage industry self employment or factory production employment contracts depending on the initial distribution in the other example it develops into prosperity or stagnation

the consequences of doubling the minimum wage the case of indonesia minimum wages in indonesia were tripled in nominal terms and doubled in real terms in the first half of the 1990s the author evaluates the effects of this hike on wage earnings wage employment and investment after describing indonesia s minimum wage policy and surveying the literature on the effects of minimum wages the author applies relatively simple statistical tools to individual and aggregate data he visually inspects the wage distribution for full time laborers and employees to assess the extent of compliance with minimum wages he uses regression analysis involving minimalist specifications and data aggregated by province to estimate the elasticity of wage earnings wage employment and investment with respect to the minimum wage a wide dispersion in the ratio of minimum wages to labor productivity across the 27 indonesian provinces can be used to identify the effects of the minimum wage the results suggest that minimum wages have a moderate effect on outcomes in indonesia s labor market taken at face value these results imply that doubling the minimum wage led to a 10 percent increase in average wages a 2 percent decrease in wage employment and a 5 percent decrease in investment the disemployment effect appears to be considerable in small firms but employment may actually increase in large firms

too many to fail evidence of regulatory forbearance when the banking sector is weak this paper studies bank failures in 21 emerging market countries in the 1990s by using a competing risk hazard model for bank survival we show that a government is less likely to take over or close a failing bank if the banking system is weak this too many to fail effect is robust to controlling for macroeconomic factors financial crises the too big to fail effect domestic financial development and concerns due to systemic risk and information spillovers the paper also shows that the too many to fail effect is stronger for larger banks and when there is a large government budget deficit

everyone may benefit from subsidising entry to risky occupations this paper shows that in the presence of costly state verification directly or indirectly subsidising entry to risky occupations may benefit everyone the result holds even in the presence of private insurance indeed it may be desirable to prohibit private insurance in favour of subsidies to hazardous activities these findings do not depend on the government having an advantage over the private sector in observing outcomes the explanation is that through its influence on equilibrium price feasible fiscal policy can shift the return distribution so as to create collective insurance more cheaply than is possible through private contracting with its requirement of costly auditing amongst applications is a case for a loss making state bank offering high interest rate loans

the politics of financial development evidence from trade liberalization incumbents in various industries have different incentives to promote or oppose financial development changes in the relative strength of promoter and opponent industries thus result in changes in the political equilibrium level of financial development we conduct an event study using a sample of 41 countries that liberalized trade during 1970 to 2000 and show that the strengthening of promoter relative to opponent industries resulting from liberalization is a good predictor of subsequent financial development the benefits of developing the financial system are insufficient for financial development and rents in particular hands appear to be necessary to achieve it copyright c 2008 by the american finance association

a stochastic model of the 2007 russian duma election in this paper we consider the nature of local nash equilibrium lne for a model of the 2007 duma election in russia using estimates of valence obtained from sociodemo graphic variables we then extend this sociodemographic valence model by including institutional valences the approval by voters of the various institutions including the president the prime minister the state duma and the federation council we show by simulation that the vote maximizing lne of this general stochastic model were not at the electoral origin the dominant feature of the election was the influence of approval or disapproval of president putin on each voter s political choice

a multiplier decomposition method to analyze poverty alleviation abstract the objective of this paper is to present a multiplier decomposition method focusing on poverty alleviation the decomposition captures the various mechanisms and linkages through which a production sector s output contributes to poverty alleviation within a socioeconomic system represented by a social accounting matrix sam it is shown that a multiplier can be broken down into two multiplicative effects the distributional and interdependency effects the decomposition method is applied to the case of indonesia a key policy implication is that the human capital of the poor needs to be enhanced if they are not to be sealed off from the industrialization process

the political economy of mass privatisation and imperfect taxation winners and loosers this article investigates the connection between the apparently uncorrelated issues of tax evasion and privatisation in a political economy framework we first consider how the political process given a country s level of development and income distribution will affect the efficiency of the tax system we then discuss the impact of the efficiency of the taxation system on the outcomes of privatisation we consider under which condition privatisation will proceed and who will be the political supporters as well as the main winners of the privatisation process moreover we investigate the impact of different forms of corruption both on the initial public support for privatisation as well as on its long term political sustainability

the proper scope of government theory and an application to prisons when should a government provide a service in house and when should it contract out provision we develop a model in which the provider can invest in improving the quality of service or reducing cost if contracts are incomplete the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee has however the private contractor s incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on noncontractible quality the model is applied to understanding the costs and benefits of prison privatization

wage vacancy contracts and coordination frictions abstract we consider a directed search model with risk averse workers and risk neutral entrepreneurs who can set up firms that post wage vacancy contracts i e contracts where firms can make payments to more than one applicant and where the payments can be different for each applicant and be contingent on the number of applicants we establish that the type of contracts the literature focuses on are not offered if firms can post wage vacancy contracts we show that there exists an equilibrium satisfying a monotonic expected utility property which is efficient furthermore we investigate the role of wage vacancy contracts on welfare and competition

labor contracts and business cycles this paper investigates the claim often put forth by real business cycle proponents that the poor performance of their models in matching real world aggregate labor market behavior is due to the fact that observed real wage payments do not correspond to the actual marginal productivity of labor but contain an insurance component that cannot be accounted for by the walrasian pricing mechanism to test this idea we dispense with the walrasian description of the labor market and introduce contractual arrangements between employees and employers assuming that employees are prevented from accessing capital markets and are more risk averse than employers we use the theory of optimal contracts to derive an equilibrium relation between aggregate states of the economy and wage labor outcomes this contractual arrangement is then embedded into a standard one sector stochastic neoclassical growth model in order to look at the business cycle implications of the contractual hypothesis the resulting dynamic equi

innovation and bureaucracy under soft and hard budget constraints because of the inherent uncertainty promotion of innovation critically depends on screening mechanisms to select projects this paper studies the relationship between bureaucracy and financial constraints as two such mechanisms the lack of commitment to hard financial constraints interferes with its ex post screening capability ex ante bureaucratic screening is optimally chosen as a substitute however bureaucracy makes mistakes by rejecting promising projects and delays innovation and the efficiency loss due to soft financial constraints increases as prior knowledge becomes worse and as research stage investment requirements become lower in a centralized economy bureaucracy may reduce the number of parallel projects particularly for projects with higher uncertainties and less research stage requirements this theory fits much of the evidence and in particular it explains why the computer industry but not the nuclear or aerospace industries has fared so poorly in centralized economies the fundamental importance of innovation to the survival and evolution of economic systems and organizations has long been recognized marx 1978 schumpeter 1950 innovation is characterized by its inherent uncertainty because it is a process whose every element takes considerable time in revealing its true features and ultimate effects schumpeter 1950 p 83 and people are unable to anticipate the future impact of successful innovations even after their technical feasibility has been established rosenberg 1994 an understanding of how different systems and organizations deal with the uncertainties associated with innovation and the resultant consequences is crucial for understanding alternative economic systems and organizations in this paper we provide a theory to analyse how different systems screen uncertain innovative projects and the impact of the various screening mechanisms on those systems we distinguish two alternative screening mechanisms the bureaucratic screening mechanism vs the market screening mechanism the latter is directly linked to financial constraints with this perspective our theory explains why centralized economies did well in certain areas of innovation but fared poorly in others for instance in the early 1960s the west was frightened by the ussr s great success in launching the first unmanned satellite and the first manned space capsule while in the 1980s in contrast the centralized system

financial institutions and the financial crisis in east asia abstract this paper investigates institutional reasons for the soft budget constraint problem and how the soft budget constraint problem creates conditions which may result in a financial crisis as a consequence of soft budget constraints bad projects do not stop bad loans accumulate and banks and depositors do not receive bad news on time poorly informed depositors are then likely to herd to overinvest when there is no bankruptcy frenzy and they are likely to herd to panic when bankruptcy occurs crash which may be the result of excessive bad loans that are also a consequence of soft budget constraints in contrast under hard budget constraints information is disclosed quickly regarding liquidation better informed investors are then less likely to herd wrongly

decentralization and macroeconomic performance in china regional autonomy has its costs abstract we give an empirical examination of the impact of fiscal and economic decentralization in china on the country s economic growth and inflation using a vector autoregressive var model with latent variables our econometric investigation offers strong evidence that there is a connection between decentralization and macroeconomic performance in china economic decentralization appears to be positively related to growth in real output for the entire postwar period in china fiscal decentralization seems to have adverse implications for the rate of inflation especially after the late 1970s decentralization would therefore seem to be good for growth and bad for price stability

unemployment with observable aggregate shocks a general equilibrium model of optimal employment contracts is developed where firms have better information about labor s marginal product than workers it is optimal for the wage to be tied to the level of employment to prevent the firm from falsely stating that the marginal product is low and cutting the wage it is shown that an observed aggregate shock that leads to an interindustry shift in labor demand and that would have no effect on total employment under symmetric information leads to a reduction in employment when firms and workers have asymmetric information

inequality and inefficiency in a model of occupational choice with asymmetric information abstract this paper presents a model of an economy with two occupations in which one occupation has access to some private information it is shown that even if all individuals are identical equality of ability and there is free entry into occupations equality of opportunity this may not be sufficient to equalize the rewards to occupations in equilibrium the only equilibrium may be one where one occupation earns more than the other and entry to the lucrative occupation is rationed we extend the analysis to the case of heterogenous individuals where we show that under reasonable assumptions asymmetric information worsens the distribution of income we also look at inefficiencies and show that with asymmetric information it may be the least productive individuals who become managers

public employees as swing voters empirical evidence on opposition to public reform reform offers economic gains for society atlarge but can represent a threat to theinterests of public employees publicsector reform faces opposition from votersemployed in public sector norwegian dataallow for an analysis this interpretation survey data show that public employeesprefer less reform than the rest of thepopulation the voting behavior of publicemployees is more sensitive to reform thanis that of other voters the swing voterhypothesis and hence shares of publicemployees in a local jurisdiction have anegative impact on the probability ofreform

agroclimatic shock income inequality and poverty evidence from burkina faso abstract this paper examines the impacts of agroclimatic shock on income inequality and poverty using household farm data from three agroecological zones of burkina faso together with income source decompositions of the gini coefficient and the foster greer thorbecke poverty index before and after a severe drought our findings reveal that because the poor lack acces to off farm income off farm income increases inequality and fails to shield poor households against agroclimatic risks the direction of the empirical relationship between changes in inequality and poverty after the drought depends critically on environmental variables and on apparent constraints on income diversification at different points in the income distribution

bank lending in transition economies bank privatization and tighter credit enforcement are believed indispensable to facilitate the eastern european transition process we analyze lending by value maximizing banks the only source of capital in the transition faced by non performing loans to the state owned sector we show that banks have a perverse incentive to fund former debtors although less efficient and more risky than private firms because they gain the potential repayment of previous debts this leads to a lower productivity of investment and a greater concentration of risk the expansion of more efficient private firms is delayed leading to a slower recovery and a greater risk of financial crisis

resistance to reform status quo bias in the presence of individual specific uncertainty comment why do governments so often fail to adopt policies which economists consider to be efficiency enhancing our answer to this question relies on uncertainty regarding the distribution of gains and losses from reform we show that there is a bias towards the status quo and hence against efficiency enhancing reforms whenever some of the individual gainers and losers from reform cannot be identified beforehand there are reforms which once adopted will receive adequate political support but would have failed to carry the day ex ante the argument does not rely on risk aversion irrationality or hysteresis due to sunk costs jel d72 f13 why do governments so often fail to adopt policies that economists consider to be efficiency enhancing this is one of the fundamental questions of political economy the answer usually relies on what may be

toward an economic model of the japanese firm i owe a great deal to professor moses abramovitz who suggested that i write this article i appreciate his constant encouragement and guidance which aided me throughout its preparation i am also indebted to three anonymous referees of the journal and to professors ryutaro komiya and michael riordan for their critical comments and helpful suggestions needless to say i am solely responsible for the views expressed in this paper

privatization in eastern europe irreversibility and critical mass effects abstract this paper proposes a model to shed light on two important policy features of privatization in central and eastern europe the idea of a necessary critical mass of privatization on one hand and the great difficulties encountered in the actual privatization process on the other the model incorporates a positive externality related to the size of the private sector multiple equilibria may arise for political and economic reasons policies of free distribution are analysed with the model they may eliminate the danger of policy reversals due to excess unemployment but may at the same time increase the relative cost of restructuring leading in some cases to pareto inferior outcomes

is the locus of poverty changing abstract urbanization is now a dominant demographic phenomenon in low and middle income countries by the year 2000 half of the world s population will live in urban areas of this half two thirds will be in developing countries predominantly in asia whether there will be a corresponding shift of poverty from rural to urban areas is the central question of this analysis evidence from cross sectional time series and case data indicates that the percent of poverty in urban areas is dependent on income levels income growth and income distribution the evidence also indicates that the number of poor in rural areas will exceed those in urban areas well into the 21st century these poverty and urbanization trends are significant politically and important also with respect to food policy and required investments in agriculture

on the persistence of rationing following liberalization a theory for economies in transition abstract many economic theorists and policy makers argue that a rapid liberalization in which prices are allowed to equilibrate supply and demand is critical for a successful transition in the formerly socialist economies yet despite the advantages of market clearing prices many local governments in these economies have kept their prices for basic goods low and induced rationing in the state sector this paper develops a theory explaining why a local government chooses either a low state price that induces rationing or a higher price that clears the market the theory predicts that a necessary condition for a local government representing its constituents interests to set a market clearing price is that the private sector is monopolistic while a market clearing price in the state sector curtails private monopoly power it also implies that the state price is higher than in the rationing regime it is shown that a local government s marginal benefit of restraining private monopoly power is higher than the marginal costs of higher state prices when there is an increase in either state sector costs or private capacity this implies that a local government is more prone to set a market clearing price as its costs increase and as private capacity grows furthermore when there are at least two private firms and the private sector is monopolistic a local government that sets a market clearing price also stabilizes private sector pricing

the vp function a survey of the literature on vote and popularity functions after 25 years vp functions explain the support for the government at votes and polls by economic and political variables most studies analyze macro time series we also cover studies of individual voters socio economic groups and regional cross sections the theory starts from the responsibil ity hypothesis voters hold the government responsible for economic conditions it works in two party block systems but not else voters in most countries are found to be sociotropic egotropic voting also occurs voters myopia is well established voting is retrospective as expectations are static it costs the average government almost 2 of the vote to rule

clientelism and polarized voting empirical evidence one must take country specific institutional features into account when analyzing former communist countries transformation process to new political institutions we do so for post communist albania where the regional and cultural polarization that has existed for centuries has evolved to clientelism in the new democracy we show how clientelistic parties give rise to very particular voting patterns these reveal major differences across regions not only in party choice but also in voters responses to government policies these responses depend on the party in government and on the region concerned this is in sharp contrast with results obtained when applying the same model to a large number of more advanced democracies with similar electoral institutions a proper evaluation of democratization in albania thus requires looking beyond the formal institutions governing elections and taking clientelism and its effect on voter behavior into account

the architecture of economic systems hierarchies and polyarchies the authors present new ways of looking at economic organizations andsystems individuals judgments entail errors they sometimes reject good projects and accept bad projects the architecture of an economicsystem specifying how the decision making units are organized togetherwithin a system who gathers what information and who communicates what with whom affects its performance both because it influences thenature of errors that individuals make within the system and becauseit has a critical effect on the aggregation of individuals errors theperformance of two polar architectures decentralized polyarchical versus centralized hierarchical decision making authorities are analyzed and compared copyright 1986 by american economic association

rational citizens against reform poverty and economic reform in transition economies the debate on the political obstacles to economic reform in postcommunist countries has centered around two interrelated theories adam przeworski argues that short term negative distributional consequences can stall economic reform joel hellman contends that industry insiders and political elites have incentives to stall economic reform although both sets of theories contend that the distributional aspects of economic transition affect reform important differences remain in their interpretation of the relationship between the rising levels of poverty and income inequality in transition economies this article empirically examines the relationship between the pretransition levels of poverty and income inequality in 17 postcommunist transition economies using cross sectional regressions the central finding in this article is that countries with large spans of the population hovering above poverty are less likely to achieve high levels of economic reform lending support to theory that adverse socioecon

decentralization duplication and delay we argue that although decentralization has advantages in finding low cost solutions these advantages are accompanied by coordination problems which lead to delay or duplication of effort or both consequently decentralization is desirable when there is little urgency or a great deal of private information but it is strictly undesirable in urgent problems when private information is less important we also examine the effect of large numbers and find that coordination problems disappear in the limit if distributions are common knowledge

the macro dimensions of food security economic growth equitable distribution and food price stability abstract rather than asking how to cope with hunger and famine the question might be how to escape their threat altogether important in this regard is recognizing that agriculture and the rural economy are greatly influenced by policies and outcomes in the rest of the economy strategies include economic growth with unchanging income distribution and growth with redistribution the latter encourages balanced growth to create non farm employment opportunities while investing in rural infrastructure

the simple economics of research portfolios this article identifies biases in market portfolios of parallel research projects arising from the noncongruence of social goals and private aspirations occasioned by those circumstances where the market rewards only the winner and where the winner is awarded the entire social surplus it is shown that under risk neutrality this noncongruence implies that t he market encourages the development of too many discoveries too lar ge a spread in the distribution of the quality of discoveries and an excessive occurrence of multiple discoveries copyright 1987 by royal economic society

inertial credit and opportunistic arrears in transition in a transition economy enterprise restructuring may exhibit a laffer curve response to tighter credit as a result of rational collective inertia in the presence of a rigid production structure unenforceable contracts and high adjustment costs a contraction in credit finance subtracts more liquidity than enterprises can generate internally because unrestructured firms are forced to extend trade credit to illiquid buyers an increase in their number increases the availability of forced supplier credit in turn increasing the attractiveness of inertial behavior as trade credit cannot be enforced a critical mass of trade and wage arrears causes pressure for a collective bailout thus validating inertial behavior even by reformable firms

privatization technology choice and aggregate outcomes abstract we analyze the macroeconomic consequences of privatization policies in transition economies due to the particular market structure in those economies strategic completnentarities in restructuring of privatized firms occur giving rise to multiple macroeconomic equilibria restructuring and the resulting macroeconomic outcomes crucially depend on how property rights are distributed and which method of privatization is chesen firm sales to single or core investors may easily lead to bad equilibria without restructuring if employees are given profit claims this is so even if the workers give up parts of their wages as a compensation for stocks wage equity swaps contrary to conventional wisdom mass privatization can have favourable influence on micro economic efficiency and may therefore lead to a good aggregate outcome as an additional feature favouring mass privatization we argue that a big bang approach to privatization might lead to a favourable equilibrium

to innovate or not to innovate incentives and innovation in hierarchies hierarchical organizations often perform poorly in inducing the adoption of innovations the authors examine a principal offering contracts to agents who make unobservable effort and adoption of innovation choices yielding moral hazard who occupy jobs of differing unobserved productivities yielding adverse selection and who engage in a repeated relationship with the principal causing a ratchet effect to arise increasing the rate of adoption of an innovation in such an organization causes the incentive costs of adoption to increase at an increasing rate relatively low rates of adoption may then be a response to the prohibitive incentive costs of higher adoption rates copyright 1990 by american economic association

reform in eastern europe how can the new governments of eastern europe succeed in moving from centrally planned to freemarket economies this incisive report identifies and describes the major policy choices to be made and discusses what will work and what will not reform in eastern europe provides a comprehensive easily read statement of reform policy that stands in the mainstream of modern western economics based on their experience with stabilization policies in other countries the authors show how eastern europe can reduce unemployment during the painful adjustment process create effective and socially acceptable mechanisms to subject enterprises to market discipline and replace barter trade under cmea with market based international trade

understanding the soft budget constraint we propose a clarification of the notion of a soft budget constraint a concept widely used in the analysis of socialist transitional and market economies our interpretation is broad enough to embrace most existing approaches to soft budget constraint phenomena and provides a classification of their causes and consequences in light of this interpretation we then review the theoretical literature on the subject and compare it with those on other dynamic commitment problems in economics

agency costs and innovation abstract stylized facts indicate that small firms are responsible for a disproportionate share of innovative research there are many possible explanations for this fact the paper seeks to understand this phenomenon as the outcome of an optimal assignment of tasks across individuals and organizations it is shown that incentive costs associated with a given task depend on the total portfolio of tasks that an individual or an organization undertakes mixing hard to measure activities innovation with easy to measure activities routine is particularly costly since it will either lead to misallocation of attention across tasks or to misallocation of risk larger firms are at a comparative disadvantage in conducting highly innovative research because of the costs associated with managing a heterogeneous set of tasks it is further argued that optimal organizational responses to coordination and control of routine tasks will lead to bureaucratization within the firm and to financial constraints imposed by capital markets both of which are hostile to innovation

the political economy of transition the overriding importance of political constraints in the transition process has led to developments of the theory of the political economy of reform what are the main insights from that theory how does it reflect the transition reality what have we learned and what do we still need to learn the present article will attempt to answer those questions

measuring changes in poverty a methodological case study of indonesia during an adjustment period analysis of the effects of policy changes on the poor is often hindered by the difficulties inherent in measuring poverty and comparing levels of poverty before and after policy changes this article outlines two techniques which can overcome many of these measurement problems stochastic dominance conditions which can facilitate a robust poverty ranking of distributions of living standards and a decomposable poverty index which allows measured changes in aggregate poverty to be disaggregated into their various components such as the changes among population subgroups and growth and redistributive components these techniques can be applied to a wide range of indicators of economic well being and poverty lines and to assumptions about the poor the approaches are illustrated using household survey data from indonesia before and after external shocks and the subsequent structural adjustment program in the mid 1980s the study finds that favorable initial conditions and pro poor pattern of growth enabled indonesia to maintain its momentum in poverty alleviation during the period

a comparison between economic systems with an application to transition abstract this paper develops a general equilibrium theory of endogenous firm and class formation under non contractibility with heterogeneous individuals a collectivist economy a private ownership economy and a mixed economy are compared on the basis of identical economic fundamentals methodological symmetry each economic system generates specific inefficiencies so that none dominates the others in general the main trade off is between the welfare loss associated with risk taking in the private ownership economy and the informational problems in the collectivist economy we then use this framework to study the political economy of transition between economic systems and provide detailed welfare results

mass privatization management control and efficiency abstract we present a model where a government chooses the number of individuals to which ownership in a former state owned firm shall be allocated when making this decision the government maximizes the political support it gets from the firm s incumbent manager and from potential shareholders anticipating that a greater dispersion of shares reduces the control of the manager by the firm s new owners it turns out that shares will be allocated to the maximum number of individuals and thus a policy of mass privatization will be implemented if the manager s utility enters the political support function with a higher weight than the welfare of the potential shareholders the result of the political process however need not conflict with the objective of achieving a pareto optimal allocation thus we contradict a widely shared presumption that mass privatization schemes sacrifice efficiency to satisfy political constraints and show that they can be very attractive from an efficiency point of view

econometrics and presidential elections this paper discusses an econometric equation that explains votes for president as a function of economic events and incumbency information the history of the equation is reviewed the update after the 1992 election is discussed and a prediction for the 1996 election is made conditional on an economic forecast

unions as commitment devices abstract under incompleteness of contracts we consider one role of unions is to function as commitment devices when wage and dismissal rates contingent on the states are not specified in labor contracts firms cannot promise ex ante to maintain employment thus firms must offer a high wage to encourage workers in accumulating skills however if unions resist firms dismissal policies unions can play a significant role as commitment devices for job security as a result since firms can decrease wage and increase employment level we can expect the profit of the unionized firms to be higher than that of non union firms

czech privatisation 25 years later privatisation is still a hot political topic today and divides economists as well as politicians and the general public the paper aims to capture the czech privatisation in its historical economic and political contexts the first part explains the difference between transitional privatisation and standard privatisation the second part examines the interests in the privatisation process the third part discusses the privatisation methods used in the czech republic the fourth part offers an international comparison

when does privatization work the impact of private ownership on corporate performance in the transition economies this paper compares the performance of privatized and state firms in the transition economies of central europe while controlling for various forms of selection bias it argues that privatization has different effects depending on the types of owners to whom it gives control in particular privatization to outsider but not insider owners has significant performance effects where privatization is effective the effect on revenue performance is very pronounced but there is no comparable effect on cost reduction overlooking the strong revenue effect of privatization to outsider owners leads to a substantial overstatement of potential employment losses from postprivatization restructuring

how robust is a poverty profile comparison of poverty such as when poverty is greatest typically matter far more for policy choices than do aggregate measures of poverty such as how many people are deemed poor the authors examine alternative methods for constructing poverty profiles focusing on their internal consistency and appropriateness for guiding policy none is perfect but some methods appear to be preferable to others when the aim is to inform policies for fighting absolute consumption poverty a case study on indonesia reveals that the country s regional and sectoral poverty profile is highly sensitive to some aspects of measurement but quite robust to others

the productivity effects of privatization longitudinal estimates from hungary romania russia and ukraine this paper estimates the effect of privatization on multifactor productivity using comprehensive panel data on initially state owned manufacturing firms in four economies we exploit the data s longitudinal dimension to control for preprivatization selection and estimate long run impacts the estimates are robust to functional form but sensitive to selection controls our preferred random growth estimates imply positive multifactor productivity effects of 15 percent in romania 8 percent in hungary and 2 percent in ukraine but a 3 percent effect in russia the foreign privatization effect is larger 18 35 percent in all countries positive domestic effects appear immediately in hungary romania and ukraine and continue growing thereafter but emerge only five years after privatization in russia

tie in sales and price discrimination this paper analyzes a class of contracts between buyers and sellers which specifies that the purchase of one good cannot be effectuated unless a second good is also purchased the economic forces resulting from a tie in are shown to be influenced by factors such as depreciation of the tying good the sales policy of the firm and the discount rate price discrimination the traditional hypothesis for this tie in is seen to make sense only when these factors align themselves in particular ways although an alternative hypothesis risk reduction is unaffected by these factors the price discrimination hypothesis therefore loses much of its appeal relative to the alternative

credit and efficiency in centralized and decentralized economies we study a credit model where because of adverse selection unprofitable projects may nevertheless be financed indeed they may continue to be financed even when shown to be low quality if sunk costs have already been incurred we show that credit decentralization offers a way for creditors to commit not to refinance such projects thereby discouraging entrepreneurs from undertaking them initially thus decentralization provides financial discipline nevertheless we argue that it puts too high a premium on short term returns the model seems pertinent to two issues soft budget constraint problems in centralized economies and differences between anglo saxon and german japanese financing practices

do the vietnamese support the economic doi moi abstract each reform implies social and economic changes after experiencing war and reunification today vietnam is implementing a comprehensive and deep process of renovation doi moi but a revolution needs the support of the population to be successful this article investigates whether the vietnamese are supportive of some of the main features of a market economy in particular the preferences for competition ownership of firms either private or public and income inequality as an incentive to productivity are studied here the data allow us to conclude that the doi moi is not at risk but the population tend to contrast income inequality

political support for reforms economics of voting in transition countries i analyze the relationship between economics and politics across eight parliamentary elections in four transition countries the czech republic hungary poland and slovakia i argue that support for reform reflects the balance between positive and negative effects of the reform accordingly i identify economic groups that support or oppose the reform the former are private entrepreneurs white collar workers and university educated voters the latter are the unemployed retirees and blue collar and agricultural workers this general pattern holds both within countries and across countries and across tenures of different governments in contrast with the responsibility hypothesis voters in the transition countries are found to be forward looking not retrospective

success and failure of reform insights from the transition of agriculture this paper analyzes the linkages between the reform strategies in transition countries and economic performance the authors focus on agriculture because of the sharpness of the policy changes fundamental differences among countries and relative simplicity of agricultural relationships the authors document post reform performance in the transition countries of asia and europe the authors show how a pricing reform and subsidy reductions b land rights reform and policies that affect farm restructuring and c the presence institutions that facilitate exchange either markets or market substitutes affect output and productivity the paper ends with general lessons on reforms and transition

hardening the budget constraint the experience of the post socialist countries abstract the study surveys the typical manifestations of the softness of the budget constraint such as state subsidies soft taxation non performing loans the accumulation of trade arrears between firms and the build up of wage arrears in the various post socialist countries it was widely maintained at the outset of the post socialist transition that the holy trinity of liberalization privatization and stabilization would suffice to produce an efficient market economy since then it has become clear that hardening the budget constraint needs to be given equal priority with these unless this occurs the effects of privatization will fall short of expectations as they have in russia

sectoral growth and poverty alleviation a multiplier decomposition technique applied to south africa abstract how does an increase in a sector s output affect poverty alleviation in this paper a multiplier decomposition for a socioeconomic system represented by a social accounting matrix sam is used to study this linkage the decomposition applied to south africa reveals that growth in agriculture services and some manufacturing sectors can alleviate poverty for the black african population for sectoral growth to be effective however the need for appropriate skill acquisition for the poor must be addressed directly only long term policies geared towards improving both economic growth and the human capital stock of the poor can lead to significant poverty alleviation

urban rural cost of living differentials in a developing economy abstract casual observations suggest that the cost of living is substantially greater in urban than rural areas of developing economies with implications for sectoral welfare comparisons an aids demand model for housing and foodgrains is estimated on a household level data set for java after adjusting housing rents for heterogeneity in quality the retrieved cost function indicates that the cost of utility at the urban price vector exceeds its rural value although the differential has been substantially overestimated in the past the relative cost of urban living is found to increase as reference rural income increases

speed of adjustment and self fulfilling failure of economic reform abstract an economic reform programme where inefficient public labour is laid off is considered the immediate effect is a lowering of wages and increased profitability in the private modern sector over time as capital accumulates in the modern sector wages and production increases big bang reform generates a sharp transitory drop in wages while gradual reform gives a more modest decline in the presence of a subsistence wage constraint popular resistance can cause the cancellation of big bang reform two arguments for gradualism can in that case be made first a more gradual reform requires a less abrupt drop in the wage and will therefore be feasible second the initial wage drop will be stronger if a cancellation of reform is expected and since cancellation is dependent on the severity of the initial wage drop multiple equilibria occurs the existence of multiple equilibria is dependent on the speed of reform sufficiently gradual programmes have a unique successful equilibrium

privatization policies in central and eastern europe privatization in central and eastern europe patrick bolton and gerard roland this paper assesses policies of mass privatization in germany czechoslovakia hungary and poland a central concern stemming from the analysis is that in view of the fiscal crisis facing economies in transition it is crucial for governments to try to maximize the proceeds from the sale of state assets because of the low initial level of private wealth it is important in this respect to let potential buyers borrow from the government or issue claims on future revenues obtained with the privatized assets to the government in order to pay for the privatized firms allowing for such non cash bids removes the government s incentive to delay privatization for fiscal reasons reduces its ability to squander immediately the proceeds from privatization and improves the decentralization of control by allowing less wealthy but more able bidders to buy the firms they are best suited to run

the gender dimensions of economic adjustment policies potential interactions and evidence to date abstract many developing countries have implemented stabilization and structural adjustment programs over the last 20 years the success of these programs depends critically on individual level responses to changing economic incentives access to control of and an ability to move productive economic resources between sectors is determined in part by gender if an individual s gender impedes their ability to fully participate in the economic adjustment process by inhibiting resource access control or movement adjustment will be impaired this paper discusses the potential gender dimensions of structural adjustment policies and examines the evidence to dale

popular attitudes toward free markets the soviet union and the united states compared random samples of the moscow and new york populations were compared in their attitudes towards free markets by administering identical telephone interviews in the two countries in may 1990 although the soviet respondents were somewhat less likely to accept exchange of money as a solution to personal problems and although their attitudes toward business were less warm the authors found that the soviet and american respondents were basically similar in some very important dimensions in their attitudes toward fairness income inequality and incentives and in their understanding of the working of markets copyright 1991 by american economic association

market enforced information asymmetry a study of claiming races this is a study of complementary markets the race track polices the betting market with information revealed in a claiming horse market this policing reduces the adverse consequences of asymmetric information experts in identifying horses and fraud are deterred from biasing betting odds against bettors at large consequently bettors specialize in evaluating published race information this monitoring theory is compared to a competing theory of claim races as a self assessed horse market parametric data is used to evaluate each theory institutional details also provide a test of each theory

endogenous choice of trade policy instruments abstract recently developed theories of endogenous trade policy formation have attempted to explain tariffs as the result of economic interest seeking by individuals or groups this note demonstrates that tariffs will not emerge as a policy choice if income is redistributed solely through trade policy induced factor price changes a production tax cum subsidy will be adopted as both gainers and losers are better off than with a tariff

the sectoral structure of poverty during an adjustment period evidence for indonesia in the mid 1980s the authors examine the structure of poverty in indonesia by sector of employment and how it changed during the adjustment period 1984 to 1987 they find that while aggregate poverty decreased during the period the gains to the poor were quite uneven across regions and sectors gains to the rural sector in key regions were quantitatively important to indonesia s success in alleviating poverty they found most poverty exists and most gains in alleviating poverty were made in the rural farming sector these gains were associated with crop diversification and continued growth in off farm employment the government s adjustment program favored rural areas and were crucial to indonesia s evident success at maintaining momentum in alleviating poverty however one should not underrate the favorable conditions in indonesia when adjustment started

implicit labor contracts and free entry the model investigated here is an adaptation of the free entry model introduced in kihlstrom laffont 1979 in that model the only labor market is one in which employers pay workers an ex ante guaranteed wage in the model of this paper there is also a spot market for labor in the earlier sections of the paper the existence of the equilibrium is established and its efficiency is investigated in this analysis it is assumed that all individuals are identical in the later sections we drop this assumption and investigate conditions under which employers are more risk averse than workers

learning dynamics and support for economic reforms why good news can be bad support for economic reforms has often shown puzzling dynamics many reforms that began successfully lost public support this paper shows that learning dynamics can rationalize this paradox because the process of revealing reform outcomes is an example of sampling without replacement this concept challenges the conventional wisdom that one should begin by revealing reform winners it may also lead to situations in which reforms that enjoy both ex ante and ex post majority support will still not come to completion the framework can be used to explain why gradual reforms worked well in china where successes in special economic zones facilitated further reform whereas this was much less the case for latin american and central and eastern european countries

on the measurement of poverty official statistics in the united states and the united kingdom show a rise in poverty between the 1970 s and the 1980 s but scepticism has been expressed with regard to these findings in particular the methods employed in the measurement of poverty have been the subject of criticism this paper re examines three basic issues in measuring poverty the choice of the poverty line the index of poverty and the relation between poverty and inequality one general theme running through the paper is that there is a diversity of judgments which enter the measurement of poverty and that it is necessary to recognize these explicitly in the procedures adopted there is likely to be disagreement about the choice of poverty line affecting both its level and its structure in this situation we may only be able to make comparisons and not to measure differences and the comparisons may lead only to a partial rather than a complete ordering the first section of the paper discusses the stochastic dominance conditions which allow such comparisons illustrating their application by reference to data for the united states the choice of poverty measure has been the subject of an extensive literature and a variety of measures have been proposed in the second section of the paper a different approach is suggested considering a class of measures satisfying certain general properties and seeking conditions under which all members of the class which includes many of those proposed give the same ranking those sceptical about measures of poverty often assert that poverty and inequality are being confounded the third section of the paper distinguishes four different viewpoints and relates them to theories of justice and views of social welfare

critical mass effect and restructuring in the transition towards a market economy abstract restructuring firms in a transition economy produces a sort of network externality in that the profitability of restructuring depends on the number of firms that already adopted this strategy we investigate under what conditions a critical mass exists i e a situation in which such externality is positive and restructuring spurs imitation possibly leading to the eventual transformation of the whole economy we find a critical mass effect when the main effect of restructuring is an increase in value added i e aggregate demand rather than an increase in the firm s ability to compete against rival home firms the critical mass case becomes the typical one when competition spurs firms efficiency

the effects of discretionary federal spending on parliamentary election results i introduction three compelling reasons to expect that discretionary federal spending will have a different impact on incumbent majority and opposition candidates in the canadian parliamentary system of government are only the prime minister and his appointed cabinet may propose spending or taxing initiatives the electorate only votes directly for their local member of parliament mp and if the prime minister declares a vote of confidence all majority party mps must vote with the prime minister or leave the party these three characteristics combined with the fact that the opposition does not have enough votes to successfully prevent passage of legislation make it very difficult for opposition mps to influence discretionary spending if the electorate is aware of this situation majority party candidates regardless of incumbency stand to reap the electoral benefits of additional federal discretionary spending furthermore opposition incumbents will lose votes as a consequence if majority candidates receive additional votes to some extent this must be at the expense of votes for opposition incumbents the purpose of this paper is to empirically test these two hypothesis the idea that discretionary spending can be used to influence election outcomes verges on the trite mass media discussions are rife with accusations of pork barrel politics this idea is implicitly contained the entire interest group theory of political decision making and it is formally modeled in papers such as weingast shepsle and johnsen 1981 despite the general agreement on the electoral motivations of discretionary spending empirical findings have been relatively unsuccessful in documenting either important or significant effects of discretionary spending or various other district level explanatory variables typical of this literature jacobson 1978 finds a negative and small effect of incumbent campaign spending and johannes and mcadams 1981 find no effect of case work on election outcomes as explained by fiorina 1981 rivers and fiorina 1989 and stein and bickers 1994 the presence of a simultaneous equation system has biased the empirical estimates since politicians are apt to shift resources towards those electoral districts where the election is expected to be closest ordinary least squares will underestimate the true effect stein and bickers demonstrate a negative correlation between the closeness of elections and the amount of pork barrel spending in congressional races in a more recent article case 2001 finds that federal block grants are negatively influenced by the expected closeness of the election in albania despite the recognition of a simultaneity bias attempts to overcome the problem have generally been unsuccessful a notable exception is that of levitt and snyder 1997 who uses spending outside of a district but inside a state as an instrument for spending in the district levitt and snyder find a positive and significant impact of discretionary spending on the share of the vote for incumbents in u s house elections this paper contributes to the discretionary spending and election literature in two ways using a newly created data set of canadian federal spending at the electoral district level the analysis of discretionary spending can be extended beyond the u s border and presidential system of government to a parliamentary system additionally the results contained herein provide a robustness check of levitt and snyder s methodology using instruments similar to those proposed by nagler and leighley 1992 and levitt and snyder 1997 consistent estimates indicate that increases in federal government spending and national gross domestic product gdp per capita have positive and significant effects on the share of the vote received by majority incumbents yet insignificant effects on opposition incumbents the sign of the point estimates are negative

the imf s unmet challenges the international monetary fund is a controversial institution whose interventions regularly provoke passionate reactions we will argue that there is an important role for the imf in helping to solve information commitment and coordination problems with significant implications for the stability of national economies and the international monetary and financial system in executing these functions the effectiveness of the imf like that of a football referee depends on whether the players see it as competent and impartial we will argue that the fund s perceived competence and impartiality and hence its effectiveness are limited by its failure to meet four challenges concerning the quality of its surveillance of individual countries groups of countries and the global system the relevance of conditionality in loan contracts the utility of the fund s approach to debt problems and the fund s failure to adopt a system of governance that gives appropriate voice to different stakeholders these problems of legitimacy will have to be addressed in order for the imf to play a more effective role in the 21st century

adjustment growth and income distribution in indonesia during the decade of the 1970s and until 1982 the growth performance of the indonesian economy was very good with gdp growing at 7 2 percent per annum oil exports provided the major engine of growth for the entire economy during that period in addition within agriculture growth was fueled by the boom in paddy production which converted indonesia from the largest rice importing country in the world to virtual self sufficiency by the mid 1980s paddy production increased at an annual rate of 7 1 percent between 1978 80 and 1983 4 the two oil price booms of 1973 and more particularly 1979 fueled a major expansion of the economy which lasted until the crisis the predominant role of the oil sector is clearly revealed by recalling that earnings from crude oil and petroleum products accounted for two thirds of all export earnings one fourth of total gnp and 70 percent of government domestic revenues in 1982 oil prices peaked in 1982 and revenues from this sector started to contract reducing drastically the basis and prospects for economic growth

capitalism and socialism a review of kornai s dynamism rivalry and the surplus economy understanding the nature of capitalism has been a central theme of economics the collapse of the eastern bloc and the global financial crisis spurred the reemergence of the political economy as a new frontier and the revival of interest in the nature of capitalism janos kornai s book dynamism rivalry and the surplus economy two essays on the nature of capitalism fills an important intellectual gap in understanding the dynamic nature of capitalism by comparing it with its mirror image socialism to further develop the themes contained in the book serious challenges are posed theoretically and empirically as well as in subjects such as hybrid capitalism

capital accumulation unemployment and self fulfilling failure of economic reform abstract i consider fiscal reform and the consequences of expectations about reform cancellation the reform implies reduced taxes and the laying off of employees in an inefficient public sector if the resulting unemployment level declines sufficiently fast the reform is completed on the other hand if high unemployment levels prevail for too long the reform is cancelled cancellation affects the return on capital negatively hence expectations about cancellation will depress capital accumulation and increase the level of unemployment as a result multiple rational expectation equilibria may arise where expectations about cancellation prove self fulfilling the modelling framework is leontief technology in combination with ramsey optimization that exhibits simple and attractive algebra