Long-run Interests Research Articles

Demagogues and the Economic Fragility of Democracies

We investigate the susceptibility of democracies to demagogues, studying tensions between representatives who guard voters’ long-run interests and demagogues who cater to voters’ short-run desires. Parties propose consumption and investment. Voters base choices on current-period consumption and valence shocks. Younger/poorer economies and economically disadvantaged voters are attracted to the demagogue’s disinvestment policies, forcing farsighted representatives to mimic them. This electoral competition can destroy democracy: if capital falls below a critical level, a death spiral ensues with capital stocks falling thereafter. We identify when economic development mitigates this risk and characterize how the death-spiral risk declines as capital grows large. (JEL D72, E21, E22, E32)

Corporate Governance and the Cult of Agency

Agency theory - as applied to debates in corporate governance - rests on a myth of separated ownership and control. The true separation, however, is between ownership and ownership: ownership of shares by shareholders and ownership of assets by the corporation. Shareholders are not principals; directors, officers, and managers are not shareholders' agents. Shareholders do elect directors, but directors then act according to corporate law, which rarely requires maximizing current shareholder value. To the contrary, corporate law allows - even encourages - directors to work for corporate longevity so long as directors have a plausible argument that their actions are in shareholders' long-run interests. Agency theory ignores this reality. Instead, much as early civilizations interpreted real-world phenomena by reference to their relationship with unseen deities, agency theorists tell tales of shareholders who struggle to keep peace with sacrifices (paying monitoring expenditures), managers make divine promises to behave (incurring bonding costs), but shareholders in the end are left to deal with the gods' uncontrolled whim (remaining managerial discretion). Yet despite thousands of articles, there is no evidence this battle is real. Managers are usually loyal, probably because so much of the focus of existing corporate law is on the control of managerial disloyalty and because the business world is far more competitive than most agency-cost models assume, leaving little scope for managerial slack. What evidence shows instead is that managers suffer from cognitive biases; most importantly, they are too optimistic. Managerial optimism and the flexibility of corporate law explain most arguable failures to maximize current shareholder value. Scholarship in both economics and law would improve if researchers faced these realities and left the cult of agency behind.

Crisis of Regional Leadership and Stagnation of Mega-projects in Asia-Pacific: Consequences for Russia

Analyses of modern trade and economic relations in Asia-Pacific region. Research of the roles of the United States of America and China under the conditions of protectionism initiated by the D. Tramp’s administration and stagnation of mega-projects. Crisis of leadership and role of USA and China in regional mega-project (APEC, TPP, RCPEC). Ability of the USA and the PRC to create regional economic priorities, as well as to determine the course of integration processes. Analysis of the main obstacles of realization of American and Chinese leadership potential. Regional integration project initiated by Japan, India and the Republic of Korea and prospects for Indo-Pacific Asia. China-USA competition and main trends of regional integration. Comparative study of opportunitiesand prospects for bilateral and mega-regional economic projects. As an example, observation of South Korean initiative “New Economic Map” is presented and analyzed. Role of “New Economic Forum” initiated by Bloomberg with support of global big business is examined also. Initiative of Indo-Pacific region, Japan-India economic cooperation are examined, as well as Washington policy to counterweight China foreign economic and political expansion. Analyzing of prospects and consequences of competition between USA and the PRC in Pacific regions. Main issues, opportunities and challenges of Russia’s economic expansion in Asia-Pacific region. Close interconnection between policy, security and economiccooperation in the region: influence on Russia’s Pacific priorities and diplomacy. Characteristics of some problems of Russian “East Policy” during last several years. Some arguments are presented in favor of Russia’s strategy of “policy of focused partnerships”. This kind of policy means prevail of business activity in some special projects as well as in some geographic areas. It is also stressed that it is in Russia’s long-run interests to use of all kind of diplomatic measures in order to minimize any attempts to oppose India to China. But try its best to support cooperation between Russia, China and India in Pacific, as well as in Indo-Pacific region.

Agency dynamics in corporate finance

We describe a framework for analyzing the dynamics of investment, borrowing, and payout decisions by public corporations. We assume that managers act entirely in their own long-run interests, subject to a governance constraint that limits their rents. Risk-neutral managers invest to maximize value but wait too long to disinvest. Efficient disinvestment can be forced by the right level of debt or by takeovers. Risk-averse managers underinvest; they do not waste free cash flow, because the governance constraint is binding. They smooth rents and consequently payout, so that changes in borrowing become a shock absorber for volatility of operating income. We obtain the Lintner model of payout if risk-averse managers have a utility function with habit formation. We show how to adapt the dynamic framework to analyze several other issues, including the effects of asymmetric information. We show that Lintner-style payout smoothing can also arise when risk-neutral managers are better informed than outsiders.

Agency Dynamics in Corporate Finance

We describe a framework for analyzing the dynamics of investment, borrowing, and payout decisions by public corporations. We assume that managers act entirely in their own long-run interests, subject to a governance constraint that limits their rents. Risk-neutral managers invest to maximize value but wait too long to disinvest. Efficient disinvestment can be forced by the right level of debt or by takeovers. Risk-averse managers underinvest; they do not waste free cash flow, because the governance constraint is binding. They smooth rents and consequently payout, so that changes in borrowing become a shock absorber for volatility of operating income. We obtain the Lintner model of payout if risk-averse managers have a utility function with habit formation. We show how to adapt the dynamic framework to analyze several other issues, including the effects of asymmetric information. We show that Lintner-style payout smoothing can also arise when risk-neutral managers are better informed than outsiders.

International Agreements, Reputational Screening and the Long-Run Interests of the State

Incomplete information on the degree to which governments internalize the long-run interests of the state is an essential element of information asymmetry in international relations. A reputational model with such incomplete information captures two observed facts: i. costly activities, among which there may be compliance with the terms of an international agreement, take place even before it formally comes into force, and ii. the parties to an agreement do not always comply with it. International agreements provide information on the level of institutional strength of countries. Such a transparency-increasing effect stems from self-selection into international agreements, which however may be imperfect. Incomplete information in other dimensions, such as the magnitude of future gains following compliance, may or may not generate an equilibrium path where i. and i. are observed: when thinking about the role of asymmetric information in supporting reputational equilibria in international relations, specifying the type of asymmetry matters. To discuss the implications of the model, we consider the case of accession of new member countries to the European Union.

Corporate Governance With Conscience - A Gateway for Economic Prosperity

Governance based on rules, regulations, legal framework, codes of conduct and ethics will lead to creative manipulative practices by the people so responsible for this by finding the loopholes and ways and means to side step every such prescription. Greed leads to clouding of the soul, and hence a behavior that is totally self-serving-seeking money, power and prestige on ever non-satisfying journey at the cost of interests of others. The type of leadership and its character are the most important factors in governance with conscience. Wisdom lies in awakened self-interest which is always served when one serves others, and cares for the humanity at large. Self-seeking behavior can be perceived to be beneficial in the short-run, but in reality it is not. Long-run interests always depend on building blocks of short-run motives. One cannot be ethical in the long-run being unethical in the short-run. Short-run supplements the long-run. Governance by leaders of character based on conscience will lead to make corporations useful to the humanity.

Corporate Governance With Conscience - A Gateway for Economic Prosperity

Governance based on rules, regulations, legal framework, codes of conduct and ethics will lead to creative manipulative practices by the people so responsible for this by finding the loopholes and ways and means to side step every such prescription. Greed leads to clouding of the soul, and hence a behavior that is totally self-serving-seeking money, power and prestige on ever non-satisfying journey at the cost of interests of others. The type of leadership and its character are the most important factors in governance with conscience. Wisdom lies in awakened self-interest which is always served when one serves others, and cares for the humanity at large. Self-seeking behavior can be perceived to be beneficial in the short-run, but in reality it is not. Long-run interests always depend on building blocks of short-run motives. One cannot be ethical in the long-run being unethical in the short-run. Short-run supplements the long-run. Governance by leaders of character based on conscience will lead to make corporations useful to the humanity.

Evolution of Time Preferences and Attitudes toward Risk

This paper explores a general model of the evolution and adaption of hedonic utility. It is shown that optimal utility will be increasing strongly in regions where choices have to be made often and decision mistakes have a severe impact on fitness. Several applications are suggested. In the context of intertemporal preferences, the model offers an evolutionary explanation for the existence of conflicting short- and long-run interests that lead to dynamic inconsistency. Concerning attitudes toward risk, an evolutionary explanation is given for S-shaped value functions that adjust to the decision maker's environment. (JEL D81, D83)

Lockbox Government: Segregated Funding Strategies and the Decline of Governmental Flexibility

Proponents of “reinvention” assert that it will produce governments that are more agile, better able to adapt to rapidly changing conditions, and able to produce public services at much lower cost. However, attempts to make government “work better and cost less” have had limited success. Policy‐makers have consequently invested their creative energy in another class of institutional innovations: segregated funding strategies, which protect agencies and programs from the impact of fiscal restraint by excluding them from normal budgeting processes. The proliferation of budget “lockboxes” may actually introduce new rigidities into the public sector and erode democratic influence in policy‐making. On the other hand, there may be some circumstances in which these devices can be justified as a method of ensuring that critical long‐run interests receive appropriate attention.

Balancing: the economic approach to sustainable water management

The economic approach to the management of water resources and systems is one of balancing competing objectives. Economics provides a framework for weighing those objectives in determining how much of each to strive for based on concerns for current use as well as long-term sustainability. More importantly, economics provides insight into policies that promote sustainable development by virtue of aligning the incentives of individuals with the long-run interests of the community. This paper shows how economic principles can be applied to reinforce sustainable choices concerning water supply, waste water treatment, irrigation, and watershed management.

Balancing: The economic approach to sustainable water management

The economic approach to the management of water resources and systems is one of balancing competing objectives. Economics provides a framework for weighing those objectives in determining how much of each to strive for based on concerns for current use as well as long-term sustainability. More importantly, economics provides insight into policies that promote sustainable development by virtue of aligning the incentives of individuals with the long-run interests of the community. This paper shows how economic principles can be applied to reinforce sustainable choices concerning water supply, waste water treatment, irrigation, and watershed management.

Epitaph for a monument to a failed protest? A North-South retrospective

The great debate of the 1970s on the New International Economic Order (NIEO) seems to have ended with a conclusive defeat for the South. The South won some battles and shifted the terms of discussion on some issues (especially debt and the interdependence of trade and monetary issues), but it clearly lost the war, at least in terms of achieving its most important declared goals. There are many interpretations of why these results ensued but, in general, the South has continued to insist that failure to reach agreement on a new international economic order should be attributed to Northern selfishness and shortsightedness, and the North has continued to insist that failure should be attributed to misguided domestic policies in the South and badly flawed and excessively ambitious international policy proposals. Disagreements about how much reform the international order needs also persist, even though some Northern governments have recently and tentatively begun to consider substantial changes in existing regimes and institutions. Southern analysts and their liberal supporters in the North have argued that the international political and economic systems were unfair, that a power shift was occurring (manifested and accelerated by the OPEC phenomenon), that the North was incorrectly perceiving its own long-run interests, that the Third World had enough common interests to hang together during the transition, and that enough issues could be treated in a North-South

Escaping the black holes of cost accounting

The author examines the gap between the methods of cost accounting and the long-run interests of the factory. He offers two possible prescriptions for change: a shift to direct costing, or the use of throughput time as the basis for full costing.

Some Policy Lessons from the Opening of the Korean Insurance Market

This article examines the recent dispute between the United States and the Republic of Korea over the opening of Korea's insurance market to U.S. companies. The article assesses the interests and motivations of both countries that lay behind the formal arguments presented during the negotiation process. It also analyzes whether the longrun interests of both developing and industrial countries would be well served by the approach to the opening of the market adopted in this case-sharing the rent while continuing to regulate the insurance market. The analysis suggests that the opening of a developing country's insurance market (or the wider financial services market) would serve the long-run interests of both developing and industrial countries only if it were accomplished in the context of overall domestic liberalization of the finance industry. Opening of the market, if this means only the sharing of the rents that were generated by regulation of the market, is unlikely to be beneficial to developing countries. This examination of the recent United States-Korea trade dispute over the limitations placed on the access of U.S. firms to the Korean insurance market provides an opportunity to investigate the interests and motivations of industrial and developing countries with respect to international transactions in financial services. The article also derives some policy lessons for other developing countries that may face a similar trade negotiation environment. Section I of the article briefly discusses the policies of the government of the Republic of Korea with respect to the insurance market, describes the structure and size of the market, and suggests some reasons for the strong interest of U.S. firms in entering the market. Section II introduces the trade dispute, and describes the issues between the two countries and their respective positions on these issues during the negotiations pursued under Section 301 of the U.S. Trade Act (see appendix). It also investigates the motivations underlying the formal arguments during negotiations and describes the bargaining counters The author is an economist in the Technical Department of the Asia Region of the World Bank. This article was prepared for the World Bank Conference on Developing Countries' Interests and International Transactions in Services, Washington, D.C., July 15-16, 1987. The author is grateful to J. Michael Finger and Brian Hindley for their valuable suggestions, to Jagdish Bhagwati and Andrej Olechowski for helpful comments, and to Peter Bocock for editorial assistance.

The tradeoff between equality and efficiency: Short-run politics and long-run realities

In concluding this paper the best way to emphasize what has been argued is to make as clear as possible what has not been argued. Nothing in the above argumentation or evidence can, or is intended to, deny that some social welfare programs genuinely serve the long-run interests of the poor. Undoubtedly such programs exist and can be identified as successful. Other programs exist, however, that are undeniably making the poor worse off. From the perspective of reducing income inequality it is obvious that the successful programs should be maintained, and even expanded in ways that further assist the poor, while the harmful programs should be terminated. Unfortunately it is simply not possible politically to select out those programs that do promote broad social goals, such as reducing poverty, while eliminating those programs that do not. This is a point that the present paper is intended to emphasize. Once you open up the political transfer process to one group, no matter how deserving that group may be, economic rents are generated that will motivate competition among politically organized interest groups. The inevitable result of this competition is a package of programs that serve a variety of interests, but which on balance do little, if anything to benefit those groups which it was our intention to assist. But even if it were widely known and accepted that the long-run distributional effects of public assistance were neutral, it would still be difficult politically to do nothing to ‘help’ the poor. Here we are faced with a particular case of what Buchanan (1977) has referred to as the Samaritan's dilemma. Actions that are motivated by feelings of compassion are difficult to resist even if the long-run effects are known to be detrimental to those who are the object of our compassion. There is no obvious escape from this dilemma, and this paper offers none. The purpose has been instead to provide an explanation of why these programs will become more politically entrenched as they become less effective at helping the poor.

Tourism politics and political science: A case of not so benign neglect

Tourism is today the second largest item of world trade. It is a source of bitter controversy and yet a topic of intense regional collaboration in both international and sub-national politics. It is a policy area infused with the most optimistic projections and the most vitriolic criticism. It is also almost totally ignored by political science. This paper presents a case for examining the politics of tourism by illustrating its intrinsic relevance to nearly every facet of the discipline. The paper also argues that in the absence of political science interest, important dimensions of the political costs and advantages of tourism have been neglected. As a consequence, the developmental potential of tourism has frequently collided unnecessarily with the public interest and even the long-run interests of the tourism industry.

The Newly Industrializing Countries and the Political Economy of Protectionism

A perennial paradox in political science is that weak actors often prevail in confrontations with more powerful actors. This article explores this problem in the context of the world trading system. The United States and the European Economic Community have been increasingly erecting selective trade barriers, such as voluntary export restraints, that discriminate against newly industrializing countries. Despite this protectionism in textiles, footwear, and other sectors, some relatively weak exporting nations have found ways to increase their gains. Ad hoc American policies have produced a structurally deficient form of trade barriers, which countries such as Taiwan and Korea have exploited. By giving priority to long-run interests, bargaining for loopholes, linking issues, cheating, and mobilizing transnational and transgovernmental allies, these exporters have generally overcome the damaging effects of protectionism. As U.S. interest groups and decision makers learn from their mistakes, the obstacles to success become more severe. But what the newly industrializing nations have shown us is that less powerful states that emphasize bargaining rather than coercion, adjustment rather than intransigence, and the substance of international agreements rather than their form, can turn an adverse situation into advantage.

Long-term energy projections for the U.S.A.

This report starts by surveying a series of papers that are representative of recent U.S. work on national and international energy policy. Among professional analysts, there are the beginnings of a consensus on energy demand projections and on energy-economy interactions. Moreover, it is recognized that conservation policies will be difficult to implement unless domestic prices are raised to the international level. The paper includes a series of long-term energy projections based upon ETA-MACRO. This model allows for: energy-economy interactions, cost-effective conservation and interfuel substitution between electric and nonelectric energy. the calculations are based upon a somewhat less optimistic view of synthetic fuels and of ‘backstop’ technologies than appear in the Carter Administration's recent proposals. With synfuels, backstops and nuclear energy—and with realistically reduced projections of demand growth—there is a reasonable prospect that the U.S. could meet an international commitment to limit oil and gas imports. U.S. import reductions could be achieved directly through the market price mechanism, without tariffs or quota limitations. For this to happen, however, the international price of oil would have to be doubled (in constant dollar terms) by the year 2000. A policy of gradual OPEC oil price increases would facilitate the transition away from oil, and could serve the long-run interests of both the producing and consuming nations.

A system of direct compensation payments to farmers as a means of reconciling short-run to long-run interests

The paper is written to answer two questions. First, should a system of direct compensation payments be introduced for the improvement of the EEC's Common Agricultural Policy? Second, how to define the DCP-system in order to make its principle practicable in a way which makes it on the one hand acceptable to those who are farming from the beginning of the system as well as for those entering later on, and on the other hand acceptable to the other part of the population and to the governments concerned. It appears from the analysis of the first question that the purpose of the present market and price policy has to be changed fundamentally. What it should do is to ensure a level of producer prices for basic agricultural products which is consistent with a situation of equilibrium concerning a rehabilitated world market, instead of trying, as at present, to ensure prices for farm products which as far as practicable result in a reasonable degree of income parity for agriculture in its present form. Newly designed market and price regulations should therefore create within the member countries of the Common Market prices for agricultural products being equal to ‘normalized’ prices of a future world market which would not be distorted by overprotection of national or ‘common’ markets. The as yet unknown price level is thought to be approximated adequately by reducing the present level of EEC prices for basic farm products by about 20%. One of the functions of the direct compensation payments will be to provide for the immediate loss of income evolving from such a reduction in agricultural prices. The analysis of the second question shows that it is possible to design an adequate system of direct compensation payments. Adequate, because it reconciles the interest of the present and the coming farmers to the interest of society at large concerning food supply, environmental values and costs both. The DCP-system will not give rise to insuperable exchequer problems. It provides ample time for a reorientation of agriculture according to the patterns of comparative advantages within the Commom Market as well as in the world at large.