new perspectives on capital sticky prices and the taylor principle abstract our main result is that dynamic new keynesian dnk models with firm specific capital feature a substantial amount of endogenous price stickiness we use this insight to assess the desirability of alternative interest rate rules and make the case for combining active monetary policy with interest rate smoothing and or some responsiveness of the nominal interest rate to real economic activity the key mechanism behind our results is also useful from a positive point of view the feature of firm specific capital increases the empirical appealingness of dnk models as documented by a growing body of literature

chinese villages and townships as industrial corporations ownership governance and market discipline1 public firms in a reforming socialist economy face two problems the old soft budget constraint syndrome and new principal agent problems china s township village government owned enterprises tves outperform state owned enterprises soes in growth rate and productivity three explanations are proposed in the literature 1 tves represent informal or ambiguous private property rights which are most efficient in partial reform 2 the small size and scale of township village governments as industrial corporations allows officials to monitor tves directly and to limit their wherewithal for cross subsidizing 3 strict market disciplines facing tves render indirect market monitoring to mitigate agency problems effectively analyses of jiangyin data show that a while both superior to local soes village and township enterprises share similar productivity and b the scale of township village corporations slightly increases productivity i conclude that local state corporatism should be revised to inc

competition policy burdens and state owned enterprise reform one of the most important remaining issues in china s transition to a market economy is the reform of state owned enterprises soe s when reforms started in late 1978 soe s dominated china s industrial sectors in every aspect after 18 years of gradual transition the soe share in china s total industrial output has declined from 77 6 percent in 1978 to 28 8 percent in 1996 however in 1996 soe s still employed 57 4 percent of urban workers and possessed 52 2 percent of total investment in industrial fixed assets improving soe performance is crucial for social stability and sustained growth in china however over 40 percent of soe s are losing money in this paper we will argue that the root of the soe problem is the separation of ownership and control and that the oftencriticized soft budget constraints arise from various state imposed policy burdens which make the state accountable for the poor perfornance of soe s the key for a successful soe reform is to remove the policy burdens and to create a level playing field so that market competition can provide sufficient information for the managerial performance of the soe s and make the managers incentives compatible with those of the state io competition and the performance of large corporation in a market economy

executive incentives and the horizon problem an empirical investigation abstract this paper investigates the hypothesis that ceos in their final years of office manage discretionary investment expenditures to improve short term earnings performance we examine the behavior of r d expenditures for a sample of firms in industries that have significant ongoing r d activities the results suggest that ceos spend less on r d during their final years in office however we find the reductions in r d expenditures are mitigated through ceo stock ownership there is no evidence that the reduced r d expenditures are associated with either poor firm performance or reductions in investment expenditures that are capitalized for accounting purposes

lack of confidence the zero lower bound and the virtue of fiscal rules abstract in the presence of the zero lower bound standard business cycle models with a taylor type monetary policy rule are prone to equilibrium multiplicity a drop in private sector confidence can drive the economy into a liquidity trap without any change in fundamentals i show in the context of a standard new keynesian model that it is possible to design ricardian fiscal spending rules that insulate the economy from such expectations driven liquidity traps in the case of price adjustment costs desirable fiscal rules ensure that a drop in confidence does not lead to a decline in real marginal costs in the case of nominal wage adjustment costs desirable fiscal spending rules ensure that a drop in confidence does not lead to a decline in the ratio of the marginal rate of substitution between private consumption and hours worked relative to the real wage rate

embeddedness and contractual relationships in china s transitional economy interfirm contracts represent common economic relations in the marketplace they are also deeply embedded in social relations and social institutions in the context of china s transitional economy this study examines how three mechanisms economizing transaction costs network based social relations and institutional links affect interfirm contractual relationships in 1 the choice of search channels for contractual partners 2 the formality and provisions in a contract and 3 the intensity of social interaction in contract implementation empirical evidence is drawn from information collected on 877 contracts from 620 firms in two chinese cities beijing and guangzhou the authors find distinct roles of social relations institutional links and regulatory environments in the initiation of contractual partners and the forms of contracts adopted whereas transaction specific factors play a significant role in the intensity of social interaction in contract implementation these findings suggest the interplay among economic calculativeness social networks and institutional links and the complementarity in the underlying theoretical ideas

chinese institutional innovation and privatization from below one of the most distinctive features of china s transition to a market economy has been the role played by rural township and village enterprises tve s in the face of sustained rapid growth of tve s the share of total industrial output produced by state owned enterprises soe s has fallen below half despite steady state sector growth and the absence of significant privatization yet most tve s are collectives a form of publicly owned enterprise this feature seems to make them unique in no other transitional economy has public ownership played such a dynamic role china presents the unusual picture of an economy that has made a transition to a primarily market economy but in which publicly owned enterprises still produce the bulk of manufacturing output surprisingly also the collective ownership form does not have a precise legal definition in china leading to some uncertainty about ultimate property rights martin weitzman and chenggang xu 1993 point out that public ownership with vaguely defined ownership ought to represent a recipe for economic disaster to them tve success suggests instead advantages to the internal institutional form of tve s which are seen to facilitate cooperation through implicit contracts among community members locked into an ongoing relationship victor nee 1992 advances a similar interpretation arguing that long time community residents create forms of income sharing that may be optimal in the absence of an independent legal system an alternative perhaps complementary view is presented here the success of tve s i argue is due largely to a set of external conditions to which tve s are an effective adaptation tve s are responses to one of the most distinctive characteristics of the chinese transition as a whole the early creation of product markets which exist for a prolonged period without well developed markets for factors of production or assets tve s are a flexible and effective but basically ordinary adaptation to this environment

chief executive officer equity incentives and accounting irregularities this study examines whether chief executive officer ceo equity based holdings and compensation provide incentives to manipulate accounting reports while several prior studies have examined this important question the empirical evidence is mixed and the existence of a link between ceo equity incentives and accounting irregularities remains an open question because inferences from prior studies may be confounded by assumptions inherent in research design choices we use propensity score matching and assess hidden omitted variable bias within a broader sample in contrast to most prior research we do not find evidence of a positive association between ceo equity incentives and accounting irregularities after matching ceos on the observable characteristics of their contracting environments instead we find some evidence that accounting irregularities occur less frequently at firms where ceos have relatively higher levels of equity incentives

markets and income inequality in rural china political advantage in an expanding economy when market reform generates rapid growth in an agrarian subsistence economy changes in inequality may be due to economic growth and structural change rather than to the intrinsic features of markets the case of post mao china is examined using nationally representative survey data gathered in 1996 to address unresolved questions about findings from 1980s surveys well into reform s second decade political officeholding has a large net impact on household income comparable to that of operating a private enterprise contrary to findings based on earlier surveys and expectations about the impact of growth cadre household advantages are stable across levels and forms of economic expansion returns to entrepreneurship however decline sharply with the spread of wage employment future declines in relative returns to political position are therefore unlikely to occur due to the further spread of private household entrepreneurship and theories of change based on this mechanism appear untenable

a theory of holdouts in wage bargaining holdouts the continuation of negotiations beyond the contract expiry date are the most common form of disputes in labor contract negotiations the authors model holdouts as a delaying tactic employed by unions to obtain information about other bargaining outcomes in their industry novel implications of their model include a positive association between holdout duration and the number of bargaining pairs negotiating contracts simultaneously bunching of holdout durations within these negotiating groups and fewer strikes among holdouts which end later in groups using a large panel of contract negotiations in canadian manufacturing the authors find considerable support for these predictions copyright 1998 by american economic association

the emergence of a market society changing mechanisms of stratification in china this article examines the effect of institutional change the shift from redistribution to markets in altering the mechanisms of stratification new institutionalists maintain that interests are emb

the roles and performance of state firms and non state firms in china s economic transition summary it is commonly accepted that state owned enterprises soes are inefficient and that non state firms drive the phenomenal growth in china however why soes are not dying out and how the non state firms thrive in a poor institutional environment remain unanswered we apply the institutional and principal agent perspectives to explain how firms with different ownerships deploy their resources and formulate strategies to achieve their goals using china s industrial census data we find that soes tend to adopt strategies conducive to fulfilling administrative tasks and empire building whereas the non state firms tend to be more profitable in the market policy and strategic implications are discussed

discussion of the impact of the options backdating scandal on shareholders and taxes and the backdating of stock option exercise dates abstract bernile and jarrell provide extensive analysis regarding the impact of backdating the stock option exercise price on stock returns for a sample of firms identified by the wall street journal dhaliwal erickson and heitzman investigate whether executives backdate the exercise date to obtain favorable tax consequences this discussion comment focuses on several fundamental issues that confront researchers examining the backdating scandal and other related decisions specifically we discuss the decision models for executives engaged in backdating and the potential role of social networks among directors selection considerations institutional voting behavior and how backdated options can be replicated with existing equity instruments

social inequalities in reforming state socialism between redistribution and markets in china this article extends market transition theory to an analysis of inequality under the conditions of partial reform in china logit regression analysis indicates cadres officials have no greater odds than other households of being among the privileged or avoiding poverty entrepreneurs andformer team cadres however are advantaged despite the rise of a hybrid elite of entrepreneurs who are currently cadres that capitalizes on redistributive power to gain competitive advantage in the marketplace increases in income inequality are modest when market reform stimulates improved economic performance the poor appear to benefit and experience comparable improvements in household income as a result there is only a slight increase in inequality at least in the early stages of market reform the empirical analysis is based on survey data collected in rural china in 1985

the decline of township and village enterprises in china s economic transition summary a paradoxical phenomenon in china s transitional economy is that markets developed under predominant public ownership which nevertheless has declined with the development of markets previous studies reveal that initial political and economic conditions of reform and fiscal decentralization gave rise to local public enterprises leading role in early marketization this paper explains the subsequent fall of such a role building and expanding on recent studies of privatization we argue that market development and competition have constrained the abilities of local public enterprises to address revenue and employment imperatives whereas local governments sales oriented growth strategies have exacerbated governance problems panel data are analyzed to provide provisional test of pertinent hypotheses

ownership organization and income inequality market transition in rural vietnam in transitional economies the scale of economic enterprise and the allocation of property rights shape social structures and influence income distribution in agrarian economies where labor intensive family enterprises dominate political officials income advantages decline rapidly relative to those of private entrepreneurs larger enterprises however provide greater income opportunities for officials especially when a government retains an ownership stake in the initial phases of reform this article replicates the findings from an earlier study of rural china using comparable survey data from vietnam we find that during the first two decades of rural market reform in vietnam and china the scale and ownership of firms differed radically small family enterprises dominated rural development in vietnam whereas china s development was dominated by larger firms initially established by rural governments consequently while cadre income advantages have kept pace with those of private entrepreneurs

selection on observed and unobserved variables assessing the effectiveness of catholic schools in this paper we measure the effect of catholic high school attendance on educational attainment and test scores because we do not have a good instrumental variable for catholic school attendance we develop new estimation methods based on the idea that the amount of selection on the observed explanatory variables in a model provides a guide to the amount of selection on the unobservables we also propose an informal way to assess selectivity bias based on measuring the ratio of selection on unobservables to selection on observables that would be required if one is to attribute the entire effect of catholic school attendance to selection bias we use our methods to estimate the effect of attending a catholic high school on a variety of outcomes our main conclusion is that catholic high schools substantially increase the probability of graduating from high school and more tentatively attending college we find little evidence of an effect on test scores

urban infrastructure financing in reform era china urban infrastructure has been substantially upgraded in reform era china this paper explains contextually and empirically how chinese cities finance their infrastructure it demonstrates that china has succeeded in addressing urban infrastructure backlogs by opening up new venues for financing but simultaneously heavily relying on unconventional sources the paper also argues that urban infrastructure financing has much to do with the country s transition to a market oriented economy that fosters the pro growth role of city governments as well as the redistribution of fiscal power between the levels of the urban hierarchy that produces significant variation of financial capacities among the different administrative ranks of cities

federalism as a commitment to reserving market incentives the authors advance a new perspective in the study of federalism their approach views federalism as a governance solution of the state to credibly preserving market incentives market incentives are preserved if the state is credibly prevented from compromising on future economic success and from bailing out future failures the salient features of federalism decentralization of information and authority and interjurisdictional competition help provide credible commitment or these purposes in addition the authors suggest that some federalism are self sustaining

growth efficiency and convergence in china s state and collective industry in china as in the soviet union and eastern europe economic reform initiatives seek to increase productivity by introducing elements of market oriented policies and institutions into an economy formerly dominated by state planning efforts to evaluate the impact of reform of chinese industry have focused on the measurement of productivity change in state enterprises this study expands the prior framework of analysis in several directions our investigation of productivity trends is not limited to state enterprises but includes quantitative comparisons with china s fast growing collective industries which contributed 36 of overall industrial output in 1988 1 unlike previous studies our analysis works with gross rather than net output this permits us to investigate changes in the productivity of intermediate inputs which occupy a large portion of total costs in chinese industry as well as labor and capital to do this we develop a quasi frontier estimation procedure which seems appropriate for comparisons of total factor productivity based on chinese industrial data finally we offer a quantitative perspective on the extent to which reform efforts have moved industrial resource allocation toward patterns expected of a market system the analysis confirms our previous finding based on a restricted framework employing only labor fixed capital and net output that multifactor productivity in state industry has risen substantially during

kinship networks and entrepreneurs in china s transitional economy1 this research draws insights from two theoretical traditions one is new institutionalism which emphasizes the role of institutions both formal and informal in economic growth the other is social network analysis which highlights the role of interpersonal relations in producing and enforcing informal norms integrating these two approaches yields the thesis that social networks affect economic growth via enforcing informal institutions the article focuses on the economic payoff of kinship networks in the context of china s rural industrialization to argue that kin solidarity and kin trust played an important role in protecting the property rights of private entrepreneurs and reducing transaction costs during the early stages of market reform when formal property rights laws were ineffective and market institutions underdeveloped data from 366 villages show that the strength of kinship networks has large positive effects on the count and workforce size of private rural enterprises and insignificant

property rights and stratification in socialist redistributive economies in socialist economies work organizations differ widely in the compensation they provide employees despite the absence of key product and labor market processes thought to ex plain such inequalities in market economies existing theories of stratification in socialist economies focus on the power and privilege of elites but inequalities among organizations are not created by political particularism or elite power in this paper i sketch elements of an institutional theory of stratification anchored in a conception of property rights the right to derive income from productive assets two aspects of property rights guide the analysis 1 the dispersion of property rights across a hierarchy of governmentjurisdictions and 2 the exercise of these rights by government jurisdictions as they extract revenues primarily through taxation extraction of revenues from a work organization varies with the budgetary resources of a government jurisdiction and the dependence of that jurisdiction on the out puts of the organization variation in revenue extraction in turn creates inequalities among work organizations in their abilities to provide benefits to employees an analysis of survey data on the provision of housing and benefits by work organizations in the large industrial city of tianjin china provides provisional support for these ideas s tudents of communist states have had little reason to dispute lenski s 1966 claim that the distribution of rewards in a society is a func tion of the distribution of power p 63 as ex emplified in szelenyi s wedding of elite theory to institutional economics this idea has been de veloped primarily in terms of the power of class es or occupational groups szelenyi 1978 be gan with the observation that planned economies operate according to redistributive rather than market principles however the process of re

federalism and the soft budget constraint the government s incentives to bail out inefficient projects are determined by the trade off between political benefits and economic costs the latter depending on the decentralization of government two effects of federalism are derived first fiscal competition among local governments under factor mobility increases the opportunity costs of bailout and thus serves as a commitment device the competition effect second monetary centralization together with fiscal decentralization induces a conflict of interests and thus may harden budget constraints and reduce inflation the checks and balance effect the authors analysis is used to interpret china s recent experience of transition to a market economy copyright 1998 by american economic association

the perils of taylor rules abstract since john taylor s 1993 carnegie rochester conf ser publ policy39 195 214 seminal paper a large literature has argued that active interest rate feedback rules that is rules that respond to increases in inflation with a more than one for one increase in the nominal interest rate are stabilizing in this paper we argue that once the zero bound on nominal interest rates is taken into account active interest rate feedback rules can easily lead to unexpected consequences specifically we show that even if the steady state at which monetary policy is active is locally the unique equilibrium typically there exist an infinite number of equilibrium trajectories originating arbitrarily close to that steady state that converge to a liquidity trap that is a steady state in which the nominal interest rate is near zero and inflation is possibly negative journal of economic literature classification numbers e52 e31 e63

eliminating a deflationary trap through superinertial interest rate rules abstract this paper demonstrates that even in the presence of a zero lower bound on nominal interest rates central banks can eliminate a deflationary trap by the conduct of interest rate rules that have superinertia

optimal monetary policy at the zero interest rate bound what should a central bank do when faced with a weak aggregate demand even after reducing the short term nominal interest rate to zero to address this question we solve a central bank s intertemporal loss minimization problem in which the non negativity constraint on nominal interest rates is explicitly considered we find that the optimal path is characterized by policy inertia in the sense that a zero interest rate policy should be continued for a while even after the natural rate of interest returns to a positive level by making such a commitment the central bank is able to achieve higher expected inflation lower long term nominal interest rates and a weaker domestic currency in the adverse periods when the natural rate of interest significantly deviates from a steady state level

optimal monetary policy and determinacy under active passive regimes abstract should one expect inflation to be stable when monetary policy is passive according to the workhorse model for monetary policy analysis the answer should be no if the passive spell is too long in this paper i develop a new keynesian model in which monetary policy is optimal subject to a loose commitment constraint i show that there is a threshold degree of commitment such that the equilibrium is locally unique when monetary policy switches between active and passive stances regardless of the length of the passive spell this result also holds for a version of the model where the passive spell is endogenous and due to a demand shock driving the economy to the zero lower bound

regional institutions ownership transformation and migration of industrial leadership in china the case of the chinese synthetic dye industry 1978 2008 scholars have emphasized the gradual ownership transformation of enterprises as a key driver of the chinese economy s unprecedented growth however little work has been done on the issue of whether this transformation process takes place evenly across the various regions in china this article describes the important role of regional institutions in shaping the ownership based competitiveness of local enterprises and the migration of industries across regions in the case of the chinese synthetic dye industry the passing of leadership from state owned enterprises soes to collectively owned enterprises coes and then to private enterprises pes was accompanied by a concurrent leadership migration from one region to another the article contends that this simultaneous occurrence was not accidental four institutional constraints the degree of central supervision the local labor arrangements the local social welfare provision and the degree of ambiguity in property rights retarded the rise of new ownership forms in the previously dominant regions this gave other regions the opening to take over leadership positions by providing a more favorable institutional context for new ownership forms these findings are likely to apply to all of the chinese manufacturing industries that existed prior to 1978 and that subsequently did not experience significant technological changes and were not highly protected by the government

local governments as industrial firms an organizational analysis of china s transitional economy despite widespread skepticism about government ownership in transitional economies china s rapid industrial growth has been led by public enterprises kornai s theory of soft budbet constraints born of the failure of earlier hungarian reforms fosters such skepticism but it assumes as fixed organizational characteristics that in fact vary widely across government jurisdictions local governments with smaller industrial bases have clearer financial incentives and constraints fewer nonfinancial interests in enterprises and a greater capacity to monitor them in china s vast public sector the fastest growth in output and productivity has occurred where government ownership rights are clearest and most easily enforced which enables officials to manage public industry as a diversified market oriented firm

is there a link between executive equity incentives and accounting fraud we compare executive equity incentives of firms accused of accounting fraud by the securities and exchange commission sec during the period 1996 2003 with two samples of firms not accused of fraud we measure equity incentives in a variety of ways and employ a battery of empirical tests we find no consistent evidence that executive equity incentives are associated with fraud these results stand in contrast to assertions by policy makers that incentives from stock based compensation and the resulting equity holdings increase the likelihood of accounting fraud

productivity growth technical progress and efficiency change in industrialized countries this paper analyzes productivity growth in 17 oecd countries over the period 1979 1988 a nonparametric programming method activity analysis is used to compute malmquist productivity indexes these are decomposed into two component measures namely technical change and efficiency change we find that u s productivity growth is slightly higher than average all of which is due to technical change japan s productivity growth is the highest in the sample with almost half due to efficiency change jel c43 d24 in this paper we apply recently developed

elite opportunity in transitional economies command economies gave communist era elites administrative control and material privilege but severely restricted money income and private wealth markets and privatization have injected new value into public assets and create unprecedented opportunities for elite insiders these opportunities depend on the extent of regime change and barriers to asset appropriation regime change varies from the survival of the entire party hierarchy to its rapid collapse and defeat in competitive elections barriers to asset appropriation vary with the extent pace and form of privatization and the concentration and liquidity of assets different combinations of such circumstances jointly affect the extent to which prior elites obtain ownership or control of privatized assets use political office to extract larger incomes move into salaried elite occupations or fall out of the elite altogether regime change and barriers to asset appropriation affect change at the national level but outcomes vary across economic sectors because of characteristics of organizations elite positions and assets this elementary theory serves to integrate varied findings from recent research on central europe china and russia and yields predictions for other regions