Bad Institutions Research Articles

Integrating the exploration-exploitation dilemma and bad institutions to the Austrian theory of destructive entrepreneurship: a new perspective

AbstractContemporary Austrian theory has expanded widely on the relationship between entrepreneurship and the structure of production, yet it has never touched on the existence of an exploration-exploitation dilemma within organizations. The objective of the article is to show that the integration of the exploration-exploitation dilemma into the Austrian theory adds new fruitful elements to the function of the destructive entrepreneur, as presented by the Austrian economists of the firm. By showing how an organization's complexity can motivate destructive entrepreneurship on competition, it firstly explains how their analytical tools, which were limited in this area to the infra-organizational field, can also be applied to the catallactic field; it secondly enriches the traditional Austrian vision of the relation between institutions and entrepreneurship, in highlighting a reverse causal relationship, that has not yet been pointed by Austrian literature on entrepreneurship, between bad institutions and the destructive entrepreneur.

Disclosure of Related Party Transactions Under IFRS: Does Cross-Listing Reduce the Legal Origin Disclosure Gap?

Synopsis The research problem We investigate whether cross-listing in the United States is associated with a reduction in disclosure deficiencies about related party transactions (RPTs) related to the legal traditions of firms’ countries of origin. Motivation The extant literature shows that there is a disclosure disparity associated to the firms’ legal origin (civil or common law) and the countries’ institutions (regulation, enforcement, and market scrutiny). The literature has not examined whether cross-listing in the United States mitigates (or eliminates) the disclosure gap for firms from civil law countries and countries with worse institutions. We focus on RPTs because the US Securities and Exchange Commission has put particular emphasis on regulation of this type of disclosure. Hypotheses H1: Among domestically listed firms, those from countries with common law tradition present superior level of RPT disclosure than firms from countries with a civil law tradition. H2: Cross-listed firms have a superior level of RPT disclosure compared to domestically listed firms from the same country. H3: Among cross-listed firms, those from countries with common law tradition present a superior level of RPT disclosure than firms from countries with a civil law tradition. Target population Firms from countries that have adopted international financial reporting standards (IFRS). We sample firms from the G20 countries that have adopted IFRS because of their representativeness in the world economy. Adopted methodology Ordinary least squares (OLS) regressions with firm and industry-year fixed effects. Two-stage least squares (instrumental variables) regressions to tackle endogeneity issues. Analyses We manually collected data from the financial reports of 531 firms from the G20 countries that have adopted IFRS to compute indices of compliance with disclosures required by IAS 24. We performed double-difference regressions, comparing firms across their legal origin (common law versus civil law), and cross-listing status (cross-listed in the United States versus domestically listed only). In addition, we studied the institutional channels that drive the disclosure gap between common and civil law firms. Findings For domestically listed firms, we found that firms from the common law tradition have RPT disclosure levels superior to those of firms from the civil law tradition. We found that the level of RPT disclosure is associated with countries’ regulatory quality, rule of law, and control of corruption. However, we did not find any differences in the level of RPT disclosure among firms cross-listed in the United States that can be associated with firms’ legal origin or with other home-country institutional features. Our results suggest that the regulatory enforcement and scrutiny of capital markets imposed by the US market compensate for home-country institutional deficiencies and eliminate differences in firms’ RPT disclosures across legal origins.

Your vote is (no) secret! How low voter density hurts anonymity and biases elections in Italy

How do electoral outcomes change when the perception of ballot secrecy falters? We answer this question in the context of Italy, where voters are assigned to polling stations according to their address and candidates know how many votes they receive in each polling station. When the number of voters per polling station (voter density) is low, this jeopardises the secrecy of voting and gives politicians an instrument to tightly monitor people. Exploiting variation in voter density across cities and over time, combined with rich data on the results of local elections across all Italian municipalities between 1989 and 2015, we estimate the effect of voter density on electoral competition. We find that when voter density is lower (and secrecy is at greater risk), politicians who are already in office (and can wield stronger retaliatory power) are more likely to retain their post. The analysis addresses the potential endogeneity of voter density. The results are stronger in regions with lower social capital and worse institutions.

Can Good Politicians Compensate for Bad Institutions? Evidence from an Original Survey of Italian Mayors

Can competent political leaders bring significant policy changes to communities otherwise doomed by “bad” informal institutions? This question has remained unanswered because of the lack of a convi...

Getting to Denmark: The dialectic of governance & development in the European periphery

Good institutions and high quality of governance are generally considered to be prerequisites for economic growth and other positive socio-economic outcomes. This is due to their role in framing decisions by agents, including policymakers, business owners or individuals. Despite the many theoretical and empirical contributions to their study, we argue that three elements deserve further attention. First is the importance of avoiding simplistic dichotomies between good vs bad institutions, a classification that obscures as much as it reveals. Second is the need to take more seriously the multi-scalar nature of institutions, particularly when studying regional policy. Third is the balance between structure and agency, which avoids deterministic readings of underdevelopment. We develop these three elements with four case studies of European regions and conclude that the scale and scope of their innovation policies is limited by nation-states and the European Union. Nonetheless, agents can (and do) mobilise to improve governance, even when operating under restrictive conditions.

Institutional change in the global economy: How trade reform can be detrimental to welfare

This study develops a theoretical model of trade with heterogeneous firms and imperfect contracting institutions to examine the impact of trade liberalization on the quality of economic institutions. The model has three main features: (1) institutions are a source of comparative advantage, (2) weak institutions benefit some firms in the open economy, and (3) those firms lobby for sup-optimal institutions in a political game. Greater trade openness increases the distributional effect of institutions and firms' incentive to engage in political lobbying. The political and economic power of firms is linked to the country's comparative advantage. Trade reform is most likely detrimental to institutions in countries specializing in goods requiring bad institutions. The unintended consequences of trade reform on institutions have important implications for the gains from trade and welfare for developing countries in the global economy.

What Russia Can Teach Us about Power and Influence in World Politics

There is a striking opposition within the current discourse on Russia’s position in the world. On the one hand, there are well-known arguments about Russia’s “weak hand” (relatively small and stagnating economy, vulnerability to sanctions, technological backwardness, deteriorating demography, corruption, bad institutions, etc.). On the other hand, Russia is accused of “global revisionism”, attempts to reshape and undermine the liberal world order, and Western democracy itself. There seems to be a paradox: Russia with a perceived decline of major resources of national power, exercises dramatically increased international influence. This paradox of power and/or influence is further explored. This paper introduces a new complex Index of national power. On the basis of ratings of countries authors compare the dynamics of distribution of power in the world with a focus on Russia’s national power in world politics since 1995. The analysis brings evidence that the cumulative resources of Russia’s power in international affairs did not increase during the last two decades. However, Russia’s influence in world politics has significantly increased as demonstrated by assertive foreign policy in different parts of the world and its perception by the international political community and the public. Russia remains a major power in today’s world, although some of its power resources are stagnating or decreasing in comparison to the US and rising China. To compensate for weaknesses Russia is using both traditional and nontraditional capabilities of international influence.

Expanding the Production Possibility Frontier of Sri Lanka: A Historical Economic Perspective on Technological Progress

Introduction: The level of living conditions in a developed country such as the United States of America, Japan or the United Kingdom is not anymore a secret for any of the Sri Lankans living in this information age. Moreover, no one in the 21st Century would reject to have that level of comfort in his or her life. Therefore, the central question that gets to one’s mind is that how they have achieved such development while we are struggling for it for decades even after independence. Alternatively, we can ask the same question, “how did they achieve that much of development while we are not having”? Answering this question is not an easy task. Even the shorted list of answers is so long, to name a few; effects of colonization, typical Sri Lankan culture, religion, corrupted political culture, bad institutions, and poor technological progress. Not to argue with the list, since it is not a complete one and the order can be different as one think. However, if we analyze it with world history, it suggests that the main culprit is the poor technological progress in the country during the past two centuries. Hence, the main objectives of this article are to answer the over raided question of “why Sri Lanka could not achieve the living conditions that the developed countries currently enjoying” and “how the future policy directions should be formulated to catch up the developed world” in a historical economic perfective.

Fata morganas in oil-rich, institution-poor economies

Oil-dependent countries suffer from bad institutions. While some believe oil to be the culprit, others have argued that institution-weak economies are poor and resource dependent as a result. This concern previously motivated examinations of resource abundance (e.g., resource production or deposits) that tend to yield different results. But this does not confirm endogeneity bias because resource abundance may not accurately capture the relative importance of natural resources to an economy. In this paper, it is demonstrated that institutional quality is indeed correlated with GDP, and that this fully explains the observed negative relationship between institutional quality and energy dependence. This finding offers broad implications that reach beyond the resource-development literature and speaks generally to the practice of scaling explanatory variables by GDP.

Trade, Law and Product Complexity

How does the quality of national institutions that enforce the rule of law influence international trade? Anderson and Marcouiller (2001) argue that bad institutions located in the importer's country deter international trade because they enable economic predators to steal and extort rents at the importer's border. We complement this research and show how good institutions located in the exporter's country enhance international trade, in particular, trade in complex products whose characteristics are difficult to fully specify in a contract. We argue that both exporter and importer institutions impact international as well as domestic transaction costs in complex and simple product markets. International transaction costs are a part of the costs of trade. Domestic transaction costs affect complex and simple products differently, thereby changing a country's comparative advantage in producing such goods. We find ample empirical evidence for these predictions: countries that have high quality institutions tend to export more complex products and import more simple products. Furthermore, institutions have a stronger influence on trade via their influence on production costs (comparative advantage) rather than on international transactions costs. International institutions seem to operate as substitutes for domestic institutions, since good domestic institutions are less important for promoting exports in those countries that have signed onto a convention that facilitates the enforcement of foreign and international arbitral awards, namely the New York Convention.

Can Good Politicians Compensate for Bad Institutions? Evidence from an Original Survey of Italian Mayors

Can competent political leaders bring significant policy changes to communities otherwise doomed by “bad” informal institutions? This question has remained unanswered due to the lack of a convincing measure of politicians’ competence. I develop a novel survey technique to measure the administrative competence of executive politicians and apply it in interviews to 306 Italian mayors. I study the impact of mayors’ administrative competence on the policies they enact using a difference-in-differences approach. Results show that more competent mayors are associated with better policies but the association is only present in cases where the quality of informal institutions is low. In these municipalities, the election of more competent mayors translates into a more effective use of funds, an increase in long-term investments, and better service provision without an increase in taxes. Results hold across different measures of institutional quality.

Are economic rents good for development? Evidence from the manufacturing sector

Abstract Are rents, or excess profits, good for development? Rents could induce firms to lobby or bribe governments to preserve the status quo; on the other hand, rents may promote growth by giving firms the needed funds to make investments in fixed capital or research and development. To test this question empirically, we use a panel of manufacturing data at the industry-country-year level, and measure rents by the mark-up ratio. We find that the relationship between rents and growth is strongly negative, with the results being primarily driven by the poorer countries (or those with worse institutions) in the sample. This result holds when we instrument for mark-up using the average mark-up in other industries in the country. Even in industries with high external financing needs and countries with less developed financial sectors, precisely the places where excess profits could be used to drive growth, we find that rents are especially harmful. Consistent with the rent-seeking mechanism we highlight, we find that high rents are associated with a slower reduction in tariffs. We also test for the most likely alternative mechanism, that higher rents cause slower growth through the channel of allowing managerial slack. We find that controlling for management has little impact on our estimate of the impact of mark-up on productivity growth.

The evolution of post‐communist systems

AbstractI propose in this article a new interpretation of the evolution of post‐communist systems by comparing the evolutions in Central and Eastern Europe and in China. Transition is reinterpreted as the result of a collapse of communist state structures in Central and Eastern Europe and, in China, in contrast, as the result of the will to prevent such an outcome. This reconceptualization helps us to better understand the emergence of bad institutions and corruption in Eastern Europe under the market economy as well as the absence of political liberalization in China and the strengthening of the power of the Communist Party in recent years.

Inversión en infraestructura y crecimiento económico, relevancia de factores institucionales

Se cuantifica el efecto que tiene la inversión en infraestructura sobre el crecimiento económico y si está condicionado por factores de índole institucional mediante modelos dinámicos de panel con variables instrumentales y técnica GMM. Los resultados son coherentes con estudios previos en cuanto a la magnitud del efecto de la infraestructura sobre el crecimiento. Se halla evidencia de que factores institucionales inciden significativamente en el potencial efecto expansivo de la infraestructura. Se encuentra que países de América Latina estarían limitando el potencial expansivo de su inversión en infraestructura al presentar indicadores de desempeño institucional desfavorables. Lo mismo estaría sucediendo con países de ingreso medio y bajo.

Redistribution, trade and corruption: an empirical assessment

ABSTRACTThis article explores the role of institutional quality in the trade and inequality nexus. Does corruption shape the relationship between trade and inequality through its impact on redistribution? Our answer to this question builds on the hypothesis that trade raises inequality and that governments may want to intervene through appropriate redistribution schemes that aim at taxing the gains from trade in a way that offsets the negative effects of trade on inequality. Moreover, we argue that this mechanism may be distorted by corruption and bad institutions in general. Quite to the contrary to common wisdom, we find that trade reduces inequality in countries with high institutional standards by means of a low level of corruption but increases inequality in countries with low levels of institutional quality.

Natural resource windfalls and economic growth nexus: a panel analysis for Africa

We employed fixed effects model to study the influences of natural resource windfalls and some variables on African economic development. For each growth model, equations were estimated for the full panel, and for the samples with good and bad institutional structures. The outcomes show that resource curse exists in Africa and can be explained by Africa's lack of good institutional structures. Hence, an implication of the results is that good institutions promote economic growth but bad institutions destroy an economy. Therefore, we first recommend the need to improve institutional quality in Africa. Second, the challenge of attaining rapid and sustainable growth and development requires Africans to strengthen and re-enforce anti-corruption laws that could discourage the further spread of corruption. Third, policymakers should ensure short-and-long term opportunities of diversifying the economy by engaging in agriculture, transportation, and services.

ON THE CONTINGENT VICE OF CORRUPTION

Abstract:This essay develops a notion of “functional corruption,” adapted from sociology, to note that the harm of corruption appears to be contingent. In a system of dysfunctional institutions, corruption can improve the efficiency and speed of allocative mechanisms of the bureaucracy, possibly quite substantially. The problem is that this “short run” benefit locks in the long run harm of corruption by making institutions much more difficult to reform. In particular, a nation with bad institutions but without bureaucracy may be much more open to reform than a nation with similarly bad institutions but with “efficiently corrupt” bureaucrats. The idea of a “long run” is developed using the North, Wallis, and Weingast conception of open access orders. Corrupt systems are likely to be locked into closed access orders indefinitely, even though everyone knows there are better institutions available.

Agglomeration by export destination: evidence from Spain

We use a dataset of Spanish exporters with rich spatial information to document the existence of agglomeration economies by export destination. More specifically, we show that, for a large set of export destinations, exporters are geographically too close to be the result of a random outcome. We also analyze the variables that explain the cross-destination heterogeneity in agglomeration. We find that firms selling to countries with worse institutions, a dissimilar language and a different currency are significantly more agglomerated. These results suggest that the value provided by agglomeration is higher concerning destinations where entry is more difficult.

Rapacious Oil Exploration in Face of Regime Switches: Breakthrough Renewable Energy and Dynamic Resource Wars

Rapacious fossil fuel extraction occurs if fossil fuel producers fear that there is a probability that their under-the-ground assets becomes worth less. They show that rapacious depletion of oil reserves occurs if there is a probability of a breakthrough renewable energy coming to the market or a probability of climate policy finally becoming seriously ambitious. These are examples of one-way regime switches leading to the so-called Green Paradox. Two-way regimes switches also lead to rapacious oil depletion. They occur if there is a chance of being removed from office in a partisan political context with perennial election cycles or if there are dynamic resource wars with the hazard of being removed from office dependent on fighting efforts. This rapacity effect is stronger in societies with bad institutions and lack of political cohesiveness.

Institutions vs. Social Interactions in Driving Economic Convergence: Evidence from Colombia

Are regions poor because they have bad institutions or are they poor because they are disconnected from the social channels through which technology diffuses? This paper tests institutional and technological theories of economic convergence by looking at income convergence across Colombian municipalities. We use formal employment and wage data to estimate growth of income per capita at the municipal level. In Colombia, municipalities are organized into 32 departamentos or states. We use cellphone metadata to cluster municipalities into 32 communication clusters, defined as a set of municipalities that are densely connected through phone calls. We show that these two forms of grouping municipalities are very different. We study the effect on municipal income growth of the characteristics of both the state and the communication cluster to which the municipality belongs. We find that belonging to a richer communication cluster accelerates convergence, while belonging to a richer state does not. This result is robust to controlling for state fixed effects when studying the impact of communication clusters and vice versa. The results point to the importance of social interactions rather than formal institutions in the growth process.