Distort Resource Allocation Research Articles

Chinese firms’ resilience after financial crisis in the context of local economic growth targets

ABSTRACT This paper explores how firms’ resilience in China during financial crises is shaped by economic growth targets. The findings indicate that ambitious growth targets set by local governments significantly boost firms’ resilience. This can be attributed to the unique blend of political centralisation and economic decentralisation, where local officials, motivated by promotions and increased fiscal revenue, mobilise various resources and measures to achieve growth targets. The influence is stronger for larger, foreign-owned firms and sectors that contribute quickly to renewed economic growth. The distorted resource allocation may generate risks for longer term regional development due to a neglect of technology and education.

Analysing the Impact of Corruption for Underdevelopment in African Countries

Corruption remains a pervasive challenge worldwide, with profound implications for the development trajectory of African nations. In recent decades, the detrimental effects of corruption on economic growth, political stability, social cohesion and institutional integrity have become increasingly evident. African countries, despite possessing abundant natural resources and human capital, often struggle to achieve sustainable development because of the pervasive influence of corruption within their socio-political and economic systems. This study aims to comprehensively analyse the multifaceted impact of corruption on the underdevelopment of African countries. By delving into the intricate interplay between corruption and various developmental indicators, including but not limited to poverty levels, infrastructure development, healthcare, education, and investment climate, this study seeks to provide valuable insights into the underlying mechanisms through which corruption impedes progress and perpetuates underdevelopment. Corruption in African countries manifests in various forms ranging from petty bribery and embezzlement to grand corruption involving high-ranking officials and multinational corporations. Such corrupt practices undermine the rule of law, erode public trust in institutions, and breed a culture of impunity, thereby stifling economic growth and exacerbating social inequality. Furthermore, corruption distorts resource allocation, diverts public funds from essential services, and impedes the effective delivery of public goods, hindering efforts to alleviate poverty and improve living standards. Moreover, the corrosive effects of corruption extend beyond the economic realms to encompass political instability and social unrest. By distorting electoral processes, undermining democratic governance, and fostering patronage networks, corruption undermines the legitimacy of governments and fuels grievances among marginalized populations, exacerbating social tensions and compromising peace and security. Understanding the intricate dynamics between corruption and underdevelopment is imperative for devising effective strategies to combat this pervasive scourge and to foster sustainable development in African countries. By identifying the root causes of corruption; assessing its systemic impact; and exploring potential policy interventions, policymakers, researchers, and development practitioners can create an enabling environment conducive to transparency, accountability, and good governance.

Is Corruption Perception Index Biased? An Ethnicity Based Analysis

Corruption is a widespread problem that affects many countries across the world. The broad definition of it is the misuse of public authority for personal benefit, which results in an allocation of resources that is less efficient than would occur in a corruptionfree environment. Corruption has a negative impact on economic growth, investment, and social development in several ways. First, corruption reduces the efficiency of public institutions and distorts resource allocation. Second, it discourages foreign investment and can lead to capital flight. Third, corruption undermines the rule of law, which is essential for economic growth. Ethnicity and economic growth are two important factors influencing corruption levels in a country. Therefore, understanding the factors contributing to corruption is essential for policymakers to develop effective measures to combat it. This research report investigates the relationship between economic growth, ethnicity, and panel-country corruption levels. Specifically, it seeks to answer the question: do economic growth and ethnicity explain the differences in panel-country corruption levels?

Economic policy uncertainty, bank competition and financial stability

PurposeThis study aims to examine the impact of economic policy uncertainty and bank competition on the financial stability of the Chinese banking industry. This study answers two fundamental questions. First, does economic policy uncertainty (EPU) affects the financial stability of banks in China? Second, does competition affect the financial stability of the Chinese banking sector?Design/methodology/approachThe sample includes all commercial banks to provide a full picture of the Chinese banking sector. This study covers the time between 2011 and 2019. The sample period captures different EPU spikes and key policy changes. This study used different econometric methodologies such as the generalized method of moments and the fixed effect and ordinary least square estimation models. Furthermore, this study used the Instrumental Variable model to solve endogeneity, autocorrelation and unobserved heterogeneity concerns. Besides, alternative EPU and financial stability measures were used. Moreover, this study reestimates the model after dropping the big five state-owned banks.FindingsThis study found that both EPU and competition reduce financial stability. This implies that EPU has a negative impact on financial stability. This shows that uncertainty distorts resource allocation efficiency and creates confusion, leading to financial instability in the banking sector. Besides, this study found that competition negatively affects financial stability. This result implies that high competition pushes banks toward riskier activities that ultimately lead to increased financial instability.Originality/valueThis study is the first of its kind that examines the impact of EPU and competition on the financial stability of the Chinese banking sector. This study conducted several robustness tests such as the instrumental variable model, alternative measurement and sample construction methods. This study brings policy implications and lessons for the banking sector.

Debt financing and maintenance expenditure: Theory and evidence on government-operated toll roads in China

Transportation infrastructure is the foundation of economic growth, and the existence of high-quality roads is inseparable from their durable maintenance. However, the burden of heavy debt has brought risks to maintenance management and distorted resource allocation. This study builds a two-stage optimal theoretical model under different debt-financing constraints in China, who has the longest expressway mileage of any country in the world. We establish the two principles of “spend-and-debt” and “debt-and-spend” to demonstrate the substitution effect and the complementary effect of debt financing on maintenance, respectively. Furthermore, we use a time-varying differences-in-differences approach to estimate the effect of the financing of tollway bonds on maintenance and further discuss the mechanism. The results provide evidence that there is a significant improvement in the relationship between tollway bonds and maintenance expenditure, mainly due to the reduction of debt costs and the passive propelling of the government’s spending responsibility. Our proposed theoretical and empirical framework sheds new light on transportation infrastructure research. More specifically, the impetus for public expenditure comes from a decrease of the substitution effect, which not only alleviates the burden of debt scale on the public sector but also provides a reference for developing countries to balance infrastructure construction and maintenance. • We build a two-stage optimal model of debt and maintenance on China’s toll roads. • We propose spend-and-debt and debt-and-spend principles under varied constraints. • We newly estimate the policy effect of tollway bonds on maintenance expenditure. • The impetus for tollway bonds comes from the reduction of the substitution effect.

How did development zones affect China’s land transfers? The scale, marketization, and resource allocation effect

The land transfer is an important policy tool for development zones (DZs) to guide the allocation of industrial resources. The immovability of land and its high reallocation cost make the efficiency loss caused by any land resource mismatch more challenging to remedy. Therefore, exploring the effects of the establishment of DZs on the land transfer policies of local governments and subsequent resource allocation can contribute to the rational control of land transfer policies. Accordingly, this study used propensity score matching, difference-in-differences estimation, and the instrumental variable method to quantify the associations among the establishment of DZs, land transfer, and resource allocation efficiency in China. The results show that the establishment of DZs promotes local governments to expand the area of transferred industrial land and increases the ratio of listing transfers, which reduces the marketization degree of land transfers. Furthermore, the establishment of DZs weakens the selection effect of land transfers, which distorts resource allocation and hinders the resource allocation efficiency of the manufacturing industry. The results suggest that it is necessary to switch from the traditional “extensive” land development strategy to the economical and intensive use of DZ land. The marketization of land transfer in the DZs should be increased and land should be allocated to firms with higher marginal output.

How Does Turnover Distort Resource Allocation? Evidence from China’s Public Procurement

How Does Turnover Distort Resource Allocation? Evidence from China’s Public Procurement

Comparison of EQ-5D Values Sets Among South American Countries

ObjectiveSocial health preference sets are necessary for conducting health economic evaluations. Values from other countries are often used when local sets are not available, which may alter the results. We aimed to evaluate the degree of variability of currently available country-specific value sets of the EuroQol EQ-5D instrument from South American countries (SAC). MethodsWe selected EQ-5D value sets from SAC and 2 reference countries. We obtained crosswalk value sets for the countries that use the EQ-5D-3L instrument. We compared the value sets with the Kruskal-Wallis test and then carried out pairwise comparisons with the Sign test. We also assessed correlations among the countries’ value sets using the Spearman test. We calculated the absolute difference across countries for each health state, considering a difference of greater than 0.05 relevant. ResultsThe range of value sets varied greatly. The Peruvian value set had the widest range (1 to −1.076) and the lowest values (median: 0.055; interquartile range: −0.171 to 0.275). The Ecuadorian set had the highest values (median: 0.587; interquartile range: 0.443-0.704). The Peruvian value set also had the greatest proportion of health states (43.6%) with a negative value, and the Uruguayan set had the smallest proportion (0.9%). Differences among countries were significant in all cases, with the greatest difference between Ecuador and Peru (median difference: 0.495; 95% confidence interval: 0.515–0.528). ConclusionSocial health preference sets varied greatly among SAC. Using non-local values could distort resource allocation decisions; hence, we recommend that countries obtain and use local value sets.

Capital Budgeting and Risk Taking Under Credit Constraints

Limited external financing creates a hedging motive that distorts resource allocation for investment projects. I study these distortions through a dynamic model with endogenous collateral constraints. The hedging motive can be broken into three components: expected future productivity, leverage capacity, and current net worth. Although constrained firms behave as if averse to transitory fluctuations in net worth, they can endogenously pursue increased exposure to both persistent factors that predict future productivity and fluctuations in credit tightness. The most constrained firms abstain from financial hedging, while still distorting capital-allocation decisions, thereby influencing firm-level volatility. These distortions contribute to a potential explanation for the negative cross-sectional relationship between volatility and net worth. This paper was accepted by Gustavo Manso, Finance.

Fraud triangle in public procurement: evidence from Indonesia

PurposeThis study aims to examine the effects of fraud triangle (pressure, opportunity and rationalization) on individual fraudulent behavior in Indonesian public procurement. Empirical research in this area is relatively sparse.Design/methodology/approachData were collected using laboratory experiments.FindingsThe results revealed that fraudulent behavior is higher when an individual has high pressure and high opportunity. These factors play an important role in determining individual rationalization. Most of participants used “displacing responsibility” to rationalize their actions. This study also demonstrated that negative affect mediates the relationship between fraudulent behavior and rationalization.Research limitations/implicationsFirst, fraudulent behavior research cannot be separated from social desirability bias. Second, the experiments only involved individual decision-making, not in groups. Finally, this study did not examine the effectiveness of rationalization in reducing negative affect.Practical implicationsOver the years, the government has only focused on the identification of pressure and reduction of opportunities, but ignored individual psychological reasons. Considering that procurement fraud is always increasing, the government must more focus on individual reasons to design an effective prevention and detection system.Social implicationsThere are various conflicts of interest in public procurement budgeting. These conflicts can distort resource allocation and causes budget leakage. As a result, the government is incapacitated to achieve social and economic goals of the community.Originality/valueThere is limited research about fraud in public procurement budgeting, especially in developing countries. In addition, the fraud triangle research, which focuses on rationalization is still limited.

With other people’s money: Campaign financing as an agency problem

Agency theory explanations for corporate political activity assume that managers distort resource allocation to invest in political connections to pursue personal benefits. While distorted resource allocations yield poor earning quality, we expect that companies with efficient governance may curb this opportunistic behavior. We used matching procedures to identify the effects of financing political campaigns on the earning quality of the firm. We assembled an original panel of listed firms in Brazil from 1998 to 2013. We found that firms that donated to electoral campaigns had a lower earning quality than nondonor firms. Firms with superior corporate governance instruments were able to reduce the harmful effects on earning quality. These results support the tenets of agency theory in explaining why firms engage in politics.

Inflation and Public Debt Reversals in the G7 Countries

This paper investigates the impact of low or high inflation on the public debt-to-GDP ratio in the G-7 countries. Our simulations suggest that if inflation were to fall to zero for five years, the average net debt-to-GDP ratio would increase by about 5 percentage points during that period. In contrast, raising inflation to 6 percent for the next five years would reduce the average net debtto-GDP ratio by about 11 percentage points under the full Fisher effect and about 14- percentage points under the partial Fisher effect. Thus higher inflation could help reduce the public debt-to-GDP ratio somewhat in advanced economies. However, it could hardly solve the debt problem on its own and would raise significant challenges and risks. First of all, it may be difficult to create higher inflation, as evidenced by Japan’s experience in the last few decades. In addition, an unanchoring of inflation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lower–income households.

Choice Under the Shadow of Conflict: An Experimental Investigation

This study uses a controlled laboratory experiment to analyze the effects of conflict on economic growth and development. Participants were given control of a small, virtual civilization and provided incentives to develop their civilization under various conflict scenarios. The findings suggest that conflict has a negative effect on economic growth (30.40 percent less wealth creation in treatment group). The shadow of conflict is enough to strongly distort resource allocation (36.6 percent less economic investment by participants under the shadow of conflict), causing less economic growth under the shadow of conflict (30.51 percent less wealth accumulation by participants under the shadow of conflict).

Abolishing the Higher Education Research Excellence Framework (the REF)

New research from the IEA outlines the serious shortfalls of the REF scheme as a way to fund higher education. The Research Excellence Framework (REF) assesses the research generated by UK universities. Most recently conducted in 2014, it is used by the national higher education funding councils (HEFCE in England) to help in allocating Quality Research (QR) money. It is likely that the REF directly influences the distribution of less than £1.5 billion, representing between one fifth and one quarter of total government research funding (most of the rest being allocated by the Research Councils). Resources distributed according to REF criteria account for only around 4 per cent of the total turnover of the higher education sector and less than 0.2 per cent of government spending. The REF shows that most high-quality research is concentrated in a limited number of leading universities, which receive the bulk of government funding. Even amongst this group, the impact of the REF outcome is relatively minor. For example, at University College London, the funding allocated as a direct result of the REF accounts for significantly less than 6 per cent of university income. The REF uses significant resources and distorts resource allocation within the higher education sector away from teaching and knowledge dissemination. It involves the appraisal of nearly 200,000 pieces of research and significant bureaucratic costs within universities. The REF distorts the allocation of resources towards the particular type of research encouraged by the REF. The REF also raises academic salaries as universities seek to improve their REF ranking by hiring key academics who score highly on REF criteria and depriving competing universities of those key academics. Despite the relatively low levels of funding distributed as a result of the REF, universities allow their behaviour to be distorted by the process because, as a government-backed kitemark, a REF rating provides signals that are useful to universities from a marketing perspective. However, there is a wide range of other, much more effective, indicators of quality of higher education institutions. Furthermore, no other country conducts an exercise quite like the REF. In relation to research funding, the same – or better – result in terms of the allocation of funds could be achieved by different means. The REF no longer serves a useful purpose and should not be repeated. We should gradually move away from institution-based funding towards project-based funding via the Research Councils. Any remaining need to allocate research support to institutions, for instance for capital purposes, should rely on available metrics rather than the REF. More generally, there is a strong case for reducing the total amount of government subsidy for research and expecting universities to generate their own funds for research and scholarship or support it by reducing overhead costs.

Inflation and Public Debt Reversals in the G7 Countries

This paper investigates the impact of low or high inflation on the public debt-to-GDP ratio in the G-7 countries. Our simulations suggest that if inflation were to fall to zero for five years, the average net debt-to-GDP ratio would increase by about 5 percentage points over the next five years. In contrast, raising inflation to 6 percent for the next five years would reduce the average net debt-to-GDP ratio by about 11 percentage points under the full Fisher effect and about 14 percentage points under the partial Fisher effect. Thus higher inflation could help reduce the public debt-to-GDP ratio somewhat in advanced economies. However, it could hardly solve the debt problem on its own and would raise significant challenges and risks. First of all, it may be difficult to create higher inflation, as evidenced by Japan’s experience in the last few decades. In addition, un-anchoring of inflation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lower–income households.

Systematic Review of Drug Administration Costs and Implications for Biopharmaceutical Manufacturing

The acquisition costs of biologic drugs are often considered to be relatively high compared with those of nonbiologics. However, the total costs of delivering these drugs also depend on the cost of administration. Ignoring drug administration costs may distort resource allocation decisions because these affect cost effectiveness. The objectives of this systematic review were to develop a framework of drug administration costs that considers both the costs of physical administration and the associated proximal costs; and, as a case example, to use this framework to evaluate administration costs for biologics within the UK National Health Service (NHS). We reviewed literature that reported estimates of administration costs for biologics within the UK NHS to identify how these costs were quantified and to examine how differences in dosage forms and regimens influenced administration costs. The literature reviewed were identified by searching the Centre for Review and Dissemination Databases (DARE, NHS EED and HTA); EMBASE (The Excerpta Medica Database); MEDLINE (using the OVID interface); Econlit (EBSCO); Tufts Medical Center Cost Effectiveness Analysis (CEA) Registry; and Google Scholar. We identified 4,344 potentially relevant studies, of which 43 studies were selected for this systematic review. We extracted estimates of the administration costs of biologics from these studies. We found evidence of variation in the way that administration costs were measured, and that this affected the magnitude of costs reported, which could then influence cost effectiveness. Our findings suggested that manufacturers of biologic medicines should pay attention to formulation issues and their impact on administration costs, because these affect the total costs of healthcare delivery and cost effectiveness.

Energy Subsidy Reform - Lessons and Implications

Energy subsidies have wide-ranging economic consequences. While aimed at protecting consumers, subsidies aggravate fiscal imbalances, crowd-out priority public spending, and depress private investment, including in the energy sector. Subsidies also distort resource allocation by encouraging excessive energy consumption, artificially promoting capital-intensive industries, reducing incentives for investment in renewable energy, and accelerating the depletion of natural resources. Most subsidy benefits are captured by higher-income households, reinforcing inequality. Even future generations are affected through the damaging effects of increased energy consumption on global warming. This paper provides: (i) the most comprehensive estimates of energy subsidies currently available for 176 countries; and (ii) an analysis of ?how to do energy subsidy reform, drawing on insights from 22 country case studies undertaken by IMF staff and analyses carried out by other institutions.

State control, access to capital and firm performance

We study the effect of state control on capital allocation and investment in China, where the government screens prospective stock issuers. We find that state firms are more likely to obtain government approval to conduct seasoned equity offerings than non-state firms. Further, non-state firms exhibit greater sensitivities of subsequent investment and stock performance to regulatory decisions on stock issuances than state firms. Our work suggests that state control of capital access distorts resource allocation and impedes the growth of non-state firms. We also provide robust evidence that financial constraints cause underinvestment.

Welfare effects of competitive lobbying efforts in international oligopoly markets

Conventionally, rent-seeking activities have been considered to deteriorate social welfare and to distort resource allocation. This paper examines whether rent-seeking behavior can improve social welfare by focusing on the welfare effects of firms’ competitive lobbying efforts when governments can impose market entry regulation against foreign firms. We demonstrate that competitive lobbying efforts can improve social welfare when such lobbying efforts are directed to reduce market entry barriers. In addition, social welfare can be maximized when the government shows the maximum sensitivity to the foreign firm's political contributions while maintaining competitive market structure. Moreover, it is shown that the dominant strategy for a domestic firm is to allocate more resources to R&D sectors while it is optimal for foreign firms is to exert more efforts in lobbying to reduce the market entry barriers when a government makes political economic approach in market entry regulations.

State Control, Access to Capital, and Firm Performance

We study the effect of state control on capital allocation and investment in China where the government screens prospective stock issuers. We find that state firms are more likely to obtain government approval to conduct seasoned equity offerings than non-state firms. Further, non-state firms exhibit greater sensitivities of subsequent investment and stock performance to regulatory decisions on stock issuances than state firms. Our work suggests that state control of capital access distorts resource allocation and impedes the growth of non-state firms. We also provide robust evidence that financial constraints cause underinvestment.