Rent Extraction Research Articles

Does common ownership constrain managerial rent extraction? Evidence from insider trading profitability

This study identifies a new economic benefit of common institutional ownership, which refers to the increasingly contentious phenomenon of U.S. firms sharing stockholders with their industry competitors. We find a significantly negative relation between common ownership and insider trading profitability. The disciplinary effect of common ownership on opportunistic insider trading is particularly evident when the information effects of common ownership are greater, when common owners are more likely to benefit from positive governance externalities, and in the subset of trades made by opportunistic insiders. Using the exogenous variations in common ownership induced by financial institution mergers, we conduct a difference-in-differences analysis and find consistent results. We also provide evidence that common owners encourage firms to impose ex-ante restrictions on insider trading and take ex-post actions to discipline opportunistic insiders by voting against management. Overall, our findings suggest that common institutional shareholders have information advantages, governance incentives, and effective means to constrain opportunistic insider trading.

Contracting with countervailing incentives under asymmetric cost information in a dual-channel supply chain

This study investigates the optimal contract design with countervailing incentives under asymmetric selling cost information in a dual-channel supply chain comprising a manufacturer and retailer. The manufacturer’s selling cost is private and determines their reservation profit, which gives rise to type-dependent participation constraints. This study provides several intriguing results. First, when the external market correctly evaluates the selling cost advantage of the manufacturer, information asymmetry does not necessarily hamper channel efficiency, even in the dual-channel setting. Second, the retailer may distort the manufacturer’s selling quantity either upward or downward, while the retailer may distort their own selling quantity in the opposite direction. Such a synergistic effect unique to the dual channels may help the retailer balance information rent extraction and channel efficiency. Third, the manufacturer may benefit from intensified channel competition as long as the cost differential is not significant, or the cost differential is significant, but the channel substitution rate is relatively low. Finally, further examining the value of information, we demonstrate that the profit differential of the retailer (manufacturer, supply chain) exhibits an inverted U-shaped (U-shaped, hat-shaped) pattern with respect to the low-cost manufacturer’s reservation profit.

Conservation by corruption: The hidden yet regulated economy in Nepal's community forest timber sector

Through the case of commercial timber production in Nepal's community forests, we uncover and explain how effective anti-corruption and harvest regulation have produced a kind of ‘allowed’ corruption that promotes forest conservation. An ethnographic study in four community forests and in-depth interviews of nearly 200 actors along the Sal (Shorea robusta) timber commodity chain showed that all actors participated in a highly organised form of collusive corruption. Anti-corruption officials call this practice “corruption without illegality” because it does not involve unauthorised harvest in community forests. Instead, it suppresses producer prices through legally required but rigged timber auctions that generate windfall profits, which sawmill owners share with upstream actors to ensure a steady supply of raw logs. Local-level timber brokers connect community forest user groups to sawmill owners. They also operate as stealth conveyers of unofficial payments to forestry officials and other upstream actors because they can camouflage such cash flows as transaction costs. Anti-corruption authorities enforce formal timber harvesting rules, which deters forestry officials from getting involved in overharvesting schemes. However, these same rules, plus some legal posturing, allow forestry officials to extract rents from legally harvested logs at minimum risk. This is hardly a coincidence because it enables the central administration to regulate difficult-to-control field-level forestry officials' behaviour without curtailing their access to informal incomes. Forest user groups lose out, but they could increase their timber income substantially by exercising their powers to decide whether or not to harvest timber. Elevating timber auction floor prices through state intervention is also feasible.

Crash for cash: Offshore financial destinations and IMF programs

A growing body of literature scrutinizes the harmful consequences of capital flight to offshore financial destinations. While financial integration is a well-known facilitator of capital flight, we shed light on an under-appreciated determinant—the availability of an IMF bailout. Expanding on previous literature analyzing moral hazard in the context of IMF programs, we introduce a socially even more destructive mechanism that we label the ‘crash for cash’ effect. We argue that by drawing on the IMF, elites can benefit from accumulating excessive debt to extract rents and hide these safely in offshore financial destinations while steering their countries into financial disaster. To test this mechanism, we show that elite wealth in offshore bank accounts has a first-order impact on a captured government’s willingness to draw on a lender of last resort. From a policy perspective, our analysis underscores the importance of closing financial loopholes to mitigate the devastating socio-economic effects of sophisticated financial engineering in a financially integrated global economy.

ESG-based remuneration in the wave of sustainability

ABSTRACT By investigating ESG-based remuneration in the UK FTSE 350 companies, this article finds that in practice, ESG-based remuneration may depart from its expected role in promoting corporate sustainability, whereas being adopted as a tactic for impression management or managerial rent extraction. Due to the unmeasurable effects of most ESG factors on shareholder value and their subjective nature, ESG-based remuneration is vulnerable to exploitation for symbolic and self-serving purposes. For companies aiming to promote long-term shareholder value, extending the assessment period of financial performance is a less costly and risky option compared to ESG-based remuneration. Differently, for companies oriented by a stakeholder purpose, ESG-based remuneration may play a part in incentivising executives to achieve plural stakeholder interests. To mitigate the risk of exploitation, this article proposes rule tightening in the current disclosure and monitoring frameworks for executive remuneration.

Firms Run by Talented Humans: Shareholder Value or Rent Extraction?

Firms Run by Talented Humans: Shareholder Value or Rent Extraction?

Strategic Formal Layoffs: Unemployment Insurance and Informal Labor Markets

Exploiting an unemployment insurance reform in Brazil, we study incentive effects of UI in the presence of informal labor markets. We find that eligibility for UI benefits increases formal layoffs by 11 percent. Most of the additional layoffs are related to workers transitioning to informal employment. We further document formal layoff and recall patterns consistent with rent extraction from the UI system. Workers are laid off as they become eligible for UI benefits and recalled when benefits cease. These patterns are stronger for industries and municipalities with a high degree of labor market informality. (JEL J22, J46, J63, J65, K31, O15)

Optimal Regulation of Noncompete Contracts

I study regulation of noncompete employment contracts, assessing the trade‐off between restricting worker mobility and encouraging firm investment. I develop an on‐the‐job search model in which firms and workers sign dynamic wage contracts with noncompete clauses and firms invest in their workers' general human capital. Employers use noncompete clauses to enforce buyout payments when their workers depart, ultimately extracting rent from future employers. This rent extraction is socially excessive, and restrictions on these clauses can improve efficiency. The optimal regulation policy is characterized. In an application to the managerial labor market using a novel contract data set, I find the optimal policy to be quantitatively close to a ban.

Platform Design and Rent Extraction

Platform Design and Rent Extraction

Risk aversion in share auctions: Estimating import rents from TRQs in Switzerland

This paper analyzes risk aversion in discriminatory share auctions. I generalize the k‐step share auction model of Kastl (2011, 2012) and establish that marginal profits are set‐identified for any given coefficient of constant absolute risk aversion. I also derive necessary conditions for best‐response behavior, which allows determining risk preferences from bidding data. Further, I show how the bidders' optimality conditions allow computing bounds on the marginal profits that are tighter than those currently available. I use my results to estimate import rents from Swiss tariff‐rate quotas on high‐quality beef. Rents are overestimated when ignoring risk aversion, and rent extraction is underestimated. Small bidders (small, privately owned butcheries) are more risk averse than large bidders (general retailers). Best response violations are few and uniform across bidder sizes.

Nothing but the Truth? Private Information and Reporting on Corporate Social Responsibility

This paper develops and tests a model in which 1) purpose-driven firms emerge as an optimal organizational form even for profit-maximizing entrepreneurs; and 2) CSR arises endogenously as a response to imperfect regulatory oversight. Purpose-driven organizations allow entrepreneurs to create rents for socially responsible (e.g. environmentally concerned) workers by allowing them to reduce the negative externalities (e.g. pollution) that would be generated without them, and to extract these rents through lower wages. Through this rent extraction entrepreneurs internalize the pro-social preferences of their responsible workers, and in turn engage in CSR through self-regulation, provided that regulatory oversight is poor enough - and hence regulation is loose enough - to make self-regulation worthwhile. The key prediction of the model is a negative impact of regulatory oversight on CSR activity. To test this, we exploit the UK's 2012 decision to mandate greenhouse gas emissions disclosure in all public firms. Consistent with our theory, we find that firms in the UK receive lower CSR ratings after increased regulatory oversight compared to firms from the other 15 European countries which did not experience mandatory disclosure requirements. We also perform a number of robustness checks and explore the interaction between oversight, wages and CSR. These empirical findings provide further support for the model.

Does Common Ownership Constrain Managerial Rent Extraction? Evidence from Insider Trading Profitability

Does Common Ownership Constrain Managerial Rent Extraction? Evidence from Insider Trading Profitability

The impact of intimate partner violence on women’s labour market outcomes

This paper investigates the impact of intimate partner violence on the participation of women in the labour market and their access to employment in the form of being a wage worker, self-employed or unpaid family worker. To address the possibility of endogeneity, especially due to simultaneity, between intimate partner violence and female labour force participation, we use the history of violence, both of the woman and her partner, as instrumental variables. Our results provide evidence that intimate partner violence is associated with an increased probability of a woman participating in the labour market. Further analysis shows that the rent extraction mechanism is the most likely explanation for the positive relationship.

Hyperproduction: a social theory of deep generative models

ABSTRACT Platformized cultural production is in flux. Artificial intelligence is often seen as a key driving force of this shift. This article examines the proliferation of AI-generated media to introduce a new concept to theorize cultural production: hyperproduction. This notion designates the penetration of cultural life with deep generative models. Juxtaposing two empirical use cases–autonomous vehicles and virtual influencers—the article problematises the convergence of simulation and reality through the lens of video game engines. Although those case studies seem to be at odds with each other, they illustrate the mechanisms of new profit models built on rent extraction. Consequently, far from ushering a Matrix-style simulation that cannot be theorized, hyperproduction remains not only grounded in, but also bounded by, reality: the reality of rentier capitalism.

Implementation of a Just Green Transition: Notions and Risks

The paper discusses opportunities and risks in making just green transitions. Existing notions of justice and results of studies of established unfavorable processes in different countries, such as insufficient support of affected groups, mechanisms of rent extraction and corrupt practices, are analyzed. The review outlines serious challenges to the necessary transitions to low carbon energy systems. On this basis, the study argues for the need to build public capacity through a preliminary and consistent framework that clearly outlines pro-development notions of justice, meaningful alignment of social and environmental goals, and honest monitoring of potential problems, along with solutions to overcome them.

The burden of the border: Precarious citizenship experiences in the wake of the Spanish housing crash

Beginning in the late 1990s, Spain experienced major changes in both its population structure and housing market. Between 1998 and 2008, the country’s immigrant population increased nearly 10-fold, from half a million foreign-born residents to five million, with the share of immigrant workers jumping from 2 per cent of all working-age people to 16 per cent. During this period, immigration accounted for the vast majority of Spain’s population growth, and this was reflected in the housing market by significant increases in the construction of new dwellings. However, the situation changed dramatically after the housing crash in 2008. In the wake of the global financial crisis of 2008 and the collapse of the country’s housing bubble, a massive wave of evictions made housing precariousness and displacement salient sociopolitical issues in Spain. Through multiple regression analyses of data from the Spanish Living Conditions Survey, this study shows that households headed by non-European Union citizens were significantly more likely than those headed by Spanish citizens to experience higher levels of housing precariousness and displacement pressure, net of housing arrears and other relevant factors. Non-European Union citizens were also significantly more likely to experience rent overburden and were found to pay higher rents than Spanish citizens for similar dwellings. By putting these results in dialogue with the ethnographic and theoretical literature on housing struggles and everyday bordering, this article argues that the differentially precarious citizenship status of migrants in Spain facilitates housing practices that multiply and thicken urban borders and facilitate rent extraction.

Assetization and the 'new asset geographies'.

An asset is both a resource and property, in that it generates income streams with its sale price based on the capitalization of those revenues. Although an asset's income streams can be financially sliced up, aggregated, and speculated upon across highly diverse geographies, there still has to be something underpinning these financial operations. Something has to generate the income that a political economic actor can lay claim to through a property or other right, entailing a process of enclosure, rent extraction, property formation, and capitalization. Geographers and other social scientists are producing a growing literature illustrating the range of new (and old) asset classes created by capitalists in their search for revenue streams, for which we argue assetization is a necessary concept to focus on the moment of enclosure and rent extraction. It is a pressing task for human geographers to unpack the diverse and contingent 'asset geographies' entailed in this assetization process. As a middle range concept and empirical problematic, we argue that assetization is an important focal point for wider debates in human geography by focusing attention on the moment of enclosure, rent extraction, and material remaking of society which the making of a financial asset implies.

Female income generation and intimate partner violence: Evidence from a representative survey in Turkey

AbstractEconomic empowerment of women is a central strategy to foster economic growth and reduce gendered discrimination. However, it is not yet certain whether the positive impacts extend into domestic violence as theoretical and empirical evidence indicate the possibility of unintentional adverse consequences. We present and analyse new survey data from Turkey. Our results indicate higher risk of intimate partner violence for income‐earning women and point to forced rent extraction by male partners as the mechanism. Organizations promoting such empowerment in development contexts should be aware of these potential negative consequences and should plan for steps to mitigate them.

Sequential Screening with Type-Enhancing Investment

Due to the well-known efficiency–rent extraction trade-off, the optimal mechanism in a pure screening environment (e.g., revenue maximization in auctions or cost minimization in procurement) typically calls for distortions in allocative efficiency when agents possess private information at the time of contracting. In this paper we introduce first-stage type-enhancing hidden investment to a standard sequential screening model of procurement, and find that (i) with convex investment cost, mitigation of allocative distortion must arise; and (ii) such mitigation can even be extreme with linear investment cost—procurement cost minimization must require social efficiency when the investment is sufficiently effective. (JEL D44, D82, H57)

The Role of Managerial Ability in Supply Chain Management

This study investigates whether supplier firms’ managerial ability affects their strategic decisions in supply chain management. Previous research documents that suppliers could collaborate with or be exploited by powerful major customers. I expect that suppliers with high-ability managers are perceived to be with more favorable future prospects to fulfill contractual obligations and thus possess stronger bargaining power. As a result, these suppliers could resist rent extraction from major customers and achieve supply chain collaboration, making it beneficial for them to operate with a concentrated customer base. Using a comprehensive sample of supply chain links, I hypothesize and find a positive association between managerial ability and customer concentration. I also find that suppliers with more able managers are more likely to continue their existing supply chain relationships. This paper extends the implications of managerial ability to the supply chain setting and adds to the understanding of collaboration/competition between suppliers and customers.