Theory Of Market Failure Research Articles

Managerial nonpecuniary preferences in the market failure theories of nonprofit organisation

PurposeManagerial nonpecuniary preferences have been emphasised by the behavioural theories of nonprofit organisation but only weakly related to this organisation's market failure theories. The present paper aims to fill this gap by examining the ways in which the market failure‐addressing capacity of nonprofit firms requires recourse to managerial nonpecuniary preferences.Design/methodology/approachThe paper proceeds by examining the ways in which the market failure theories of nonprofit organisation conceptualise this organisation's market failure‐addressing mechanism.FindingsIt is shown that the market failure theories of nonprofit organisation can be logically complete only if they include an explanation of managerial motivation consisting in the gratification of nonpecuniary preferences.Practical/implicationsNonprofit firms are thereby shown to address market failures in a way different from that of for‐profit firms. Specifically, whereas for‐profit firms address market failures based on their advantages over market organisation in processing information and aligning incentives, nonprofit firms make the production of goods and services that are undersupplied due to market failures the object of nonprofit managers' nonpecuniary preferences.Originality/valueThe economic theory of nonprofit organisation has been traditionally marked by a dichotomy of the market failure theories and behavioural theories, only the latter of which recognised the role of managerial nonpecuniary preferences. By demonstrating that these preferences are crucial to the former theories as well, this paper integrates these two theorising strands and thus deepens the theoretical understanding of the nonprofit sector.

Food Insecurity as Market Failure: A Contribution from Economics

ABSTRACT The complexity of food security requires an interdisciplinary approach in its study. For policy development and analysis, an essential element of this interdisciplinary approach is economics. At the center of the rationale provided by economics for government intervention is the idea of market failure. The paper argues that the economic theory of market failure, and in particular the concepts of externalities and public goods, can be effectively used for analyzing and criticizing the present food system. It also argues that through a better understanding of these economic concepts, governments can devise market-based policies for improving food security.

Pflege und Gesundheit – zwei ungleiche Schwestern?

Summary The Social Long-term Care Insurance (Gesetzliche Pflegeversicherung, GPV) is in a crisis which will clearly intensify without reforms. An important solution strategy is the introduction of competition elements. This concerns the competition between the Long-term Care Insurance as well as the competition between the service providers. In comparison to the Social Health Insurance (Gesetzliche Krankenvereicherung, GKV) this coordination procedure can be found up to now very rarely. It is examined with the help of the market failure theory which market problems can be found in the area of long-term care. Here, nursing goods as well as the market for nursing insurances are examined. In comparison to the GKV, the lacking consumer’s sovereignty and problems with principal-agent-relations aggravate the situation in the GPV. However, other market failures are rather less important. An enlarged discussion of differences between GPV and GKV leads to the question of the institutional arrangement. This concerns on the one hand the possible amount of market and competition in the GPV as well as, on the other hand, the relation between GKV and GPV. In particular the interface problems between both social insurance systems are discussed.

Austrian Economics and the Market Test Reexamined

The efficacy of the decentralized market process is perhaps the foremost contribution of Austrian economics. But if Austrians are correct about the performance of spontaneous order processes, the paucity of Austrian economists in academic positions seemingly undermines their methodological critique of neoclassical economics. Whether Austrian economics has faced a valid market test remains an issue of continuing controversy, as the exchange between Rosen (1997) and Yeager (1997) illustrates. 1 In this paper I examine when a market can be appropriately said to offer a “test” of products and whether Austrian economics has faced a meaningful market test. In essence this paper explores the question of inefficiency in spontaneous orders. Do all spontaneous order processes perform well? Economics catalogues causes of “market failure,” but the catalogue is based on end state or equilibrium theorizing, that is, comparing the end state attained by the market with Pareto efficient states. The theory of market failure has been criticized by many; from an Austrian perspective, end state welfare economics is irrelevant when the economy does not reach an equilibrium. But this leaves unanswered whether all spontaneous order processes perform well. If spontaneous orders necessarily perform well, the conclusion that the profession has judged Austrian economics inferior to neoclassical economics seems unavoidable. I begin by discussing when markets offer a test, since as Yeager (1997) points out, markets have never been defended as arbiters of truth or beauty. 2

Leverage and business groups: Evidence from Indian firms

The motivation of this paper is that information problems and other market imperfections, which explain the business group phenomenon of firm ownership structure in emerging markets, also underpin mainstream theories of firm leverage. We draw from elements of theories of business groups as well as capital structure theories to specify a generic model of capital structure, which is then estimated and tested on a sample of 1652 quoted non-financial firms in India, including group-affiliated and independent firms. It is found that the leverage decisions of group-affiliated firms are significantly different from those of non-affiliated firms, suggesting that the business group ownership structure creates virtual (or internal) capital markets. Further evidence indicates that group-affiliated firms enjoy exceptional access to government and foreign loans, as proposed by the market failure and policy distortion theories of business groups.

The Doctrine of Market Failure and Early Development Theory

The economics profession is undoubtedly enjoying a revival of free-market approaches to questions of development. The unfettered market is expected to produce efficiency and growth, and government action is deemed as either unnecessary or as an impediment. A market-friendly approach has not always been the case. Fewer than 50 years ago development economics embraced a more active role for the state. It doubted the efficacy of markets and argued instead that the state was the only economic agent capable of bringing about the fundamental changes required. The interventionist approach of early development economics can be understood as a result, in part, of the rise to prominence of theories of market failure around the watershed events of the 1930s and 1940s. Several theories of market failure, as adopted by development, are explored.Today the national plan appears to have joined the national anthem and the national flag as symbols of sovereignty and modernity(Waterston 1965, p. 28).

Capital Market Failure, Adverse Selection and Equity Financing of Higher Education

We apply theories of capital market failure to analyze optimal financing of risky higher education. In the market solution, students can only finance their education through debt. There is underinvestment in human capital, because some students with socially profitable investments in human capital will not invest in education due to adverse selection problems in debt markets and because insurance markets for human capital related risk are absent. Legal limitations on the use of human capital in financial contracts cause this underinvestment; without them private markets would optimally finance these risky investments through equity rather than debt and supply income insurance. The government, however, can circumvent this problem and implement equity and insurance contracts through the tax system using a graduate tax. This paper shows that public equity financing of education coupled to provision of some income insurance is the optimal way to finance education when private markets fail due to adverse selection. We show that education subsidies to restore market inefficiencies are sub-optimal.

Harnessing Self-Interest: Mill, Sidwick, and the Evolution of the Theory of Market Failure

This essay is the first step in a larger effort to understand exactly how and why the marginal revolution gave us a theory of economic policy that evidenced an increased confidence in the ability of governmental policy actions to improve on the performance of the market. This was done via two relatively simultaneous changes in the views of the problem: first, in terms of demonstrating both a greatly expanded theory of the failure of the system of natural liberty (akin to what we today call market failure) as against the classical view, and second, through a more markedly positive view of the possibilities of corrective policy actions by the state. The writings of John Stuart Mill and Henry Sidgwick mark a turning point in this line of literature, and this essay will show how their work represented a departure from that which came before, the forces that led them to their respective views on the subject, and the role these ideas played in the development of the more expansive role for government evidenced in early stages of welfare economics.

ECONOMIC ANALYSIS AND INTER‐JURISDICTIONAL COMPETITION

The European Union does not set its regulatory principles in line with those that the theory of public goods suggests. The Union does not have full competence in areas such as defence that might involve public goods over a Europe‐wide area. Yet it does have competence over many areas that should be left to member states or local government. However, if competition between jurisdictions is prevented, there will be a drift towards centralisation of economic decision‐making. This paper analyses this trend from the point of view of the theory of clubs and theories of market failure.

Business groups and their corporate strategies on the Argentine roller coaster of competitive and anti-competitive shocks

Executive Overview Argentine economic history can be pictured as a series of severe economic ups and downs, which created unique managerial challenges for growing businesses. In this article we show how Argentine entrepreneurs have successfully crafted strategies and organizational forms to cope with this economic “roller coaster.” Our work is founded on the resource-based view, state development and market-failure theories, and relies on data from historical evidence, surveys, and thorough interviews with CEOs of the largest Argentine firms--known as Argentine Business Groups (ABGs). We found that ABGs generally expanded their corporate portfolios in periods of higher uncertainty by skillfully maneuvering through labor and capital market deficiencies and leveraging preferred foreign and local contacts and opportunities. We also found that in response to the Argentine market-oriented reforms of the 1990s, many ABGs trimmed their business portfolios and expanded internationally to compete more effectively....

The behavioural study of political ideology and public policy: Testing the Janda, Berry, and Goldman model

In previous work the authors found a variant of the theory of market failure to be a way to link political ideology and public policy for business and economics. However, the theory of market failure says little about other aspects of ideology and domestic public policy. Janda, Berry, and Goldman offer a model of ideological attitudes toward equality, freedom, and order that might explain ideological positions toward public policy unrelated to business and the economy. The present study compares the Janda, Berry, and Goldman model to depictions of liberalism and conservatism in a variety of scholarly journals and finds the model to be partly valid.

Internal Market Failure: A Framework for Diagnosing Firm Inefficiency*

ABSTRACT The theory of market and government failure can be used to diagnose inefficiency within firms and to identify strategies to deal with these problems. Internal market failures (IMFs) – internal public good problems, internal negative and positive externalities, internal information asymmetries, internal monopolies, the presence of uncertainty – create inefficiencies within firms just as they do in normal markets. As well, self‐interested behaviour by executives and internal interest groups (rent‐seeking) are analogous to government, or governance, failures (IGFs). Associated with many of these internal market failure problems are generic solutions that can usefully inform executives in their efforts to improve efficiency within the firm. Internal governance failures, in contrast, normally require action by shareholders and boards of directors.

When are Governmental Interventions into Freedom Constitutionally Legitimate?

The German constitution stands out for the exceptionally powerful position of the Constitutional Court. Any governmental intervention into freedom, and any unequal treatment, are constitutional issues. And any inhabitant can attack any administrative act, and any piece of legislation, in the Constitutional Court. The basic test is proportionality. Given the legislators', or the administrators', end the interference must be conducive, least intrusive, and not out of proportion. All three tests are relative. How powerful they are depends on the definition of the governmental aim. Unlike constitutional jurisprudence, doctrine is hesitant to say which governmental aims are constitutionally legitimate. The paper does two things: it reconstructs dogmatic principles for the definition of governmental aims from the jurisprudence, and it demonstrates how the quality of these definitions can be improved by relying on concepts from the social sciences, like the economic theory of market failure. Sceptics raise three concerns: there is no universally agreed philosophical starting point from which the legitimacy of governmental aims could deductively be derived; the Constitutional Court is ill prepared for engaging in the application of theories from the social sciences; strict dogmatic principles for the definition of legitimate aims siphon power away from the democratically elected legislator. The paper rebuts all three concerns.

Thoughts Stimulated by Reading Geoffrey Hodgson's Economics and Utopia

This is a wonderfully stimulating and powerful book. I continue to be impressed by how effectively Hodgson can draw material from the history of economic and social thought to raise issues and make points highly relevant to contemporary discussion and analysis. While I was reasonably familiar with much of the intellectual history that Hodgson considers in this book, I still learned a lot from his history of socialist thought, and his discussion of the various strands of ideological support for market capitalism. I have chosen here not to give a general review of Hodgson's book, but rather to focus on two (I would argue overlapping) issues raised by his exposition. The first is the question of how modern mainstream economic analysis became so narrow analytically, and so market-oriented. The second is the issue of how to characterize and understand modern mixed economies, which, of course, is what we have. This last year I had occasion to go back and reread many of the economic classics, from Smith, to Mill, to Marshall, Schumpeter, Frank Knight, Hayek. I was again struck by the breadth, sophistication, and in most cases the open-mindedness of our predecessors, and for the most part (Hayek here is an exception) the fact that they saw the warts on market organization, as well as the advantages. I propose that the intellectual, and ideological, narrowness of mainstream economics that is the subject of Hodgson's concern is a relatively recent phenomena, taking hold no earlier than the late 1960s or early 1970s. This is not to argue that prior to that time there were no prominent economists putting forth a dogmatic faith in market capitalism. There were; Hayek and Friedman are good examples. Hodgson's book gives many others. And there certainly were programs that were unified around that faith; for example the program at the University of Chicago, at least after 1950 But my argument is that these were far from the rule, and were balanced or more than balanced by economists and programs who were pragmatic and eclectic about the advantages and problems of market organization. My own graduate education in economics, which took place before that time, was not narrow, or strongly ideologically slanted in favor of market organization and capitalism. I, like I believe most American graduate students in economics at first-rate universities at that time, read a lot in the history of economic thought. Economic history was a required subject, and no weak sister to and econometrics. The courses on macroeconomics were very much oriented to an active Keynesianism. The problems of market power were taken seriously in courses in industrial organization, and considerable attention was paid to active government policies to prevent or break up monopolies, or to regulate them. The theory of market failure was taught along side the twin theorems of welfare economics, and provided what was regarded as a solid basis for public finance of public goods, and regulation of externalities. The issues of income inequalities and poverty were not glossed over either. And the term mixed economy for w hat we had in the U.S., in the U.K. and in Europe, was standard. What happened to cause, or to permit, the narrowing? I once thought fear of and ideological conflict with the Soviet Union was an important reason. However, that fear and conflict certainly was there in full strength by the mid-1950s, before the narrowing occurred. Rather, I now would focus on something else. One was the growing tendency within economics to think of mathematical modeling as not simply one useful way to theorize in economics, but as the only legitimate way. When I was a graduate student, some mathematics was used in the basic economic theory courses, but a lot of the discussion and reading was verbal and often associated with attempts to characterize real economic institutions. …

Market Failures and the Evolution of State Regulation of Managed Care

I INTRODUCTION States have enacted numerous statutes in response to widespread dissatisfaction with managed care, which was exacerbated by its growth during the 1990s. Known as managed care patient care laws, the statutes address concerns of consumers and medical care providers. Organized medicine, a very effective political force, harnessed consumer dissatisfaction. (1) Accordingly, the first wave of laws, prior to the mid-1990s, was primarily the result of lobbying by physicians and focused on any-willing-provider laws and laws requiring the inclusion of certain types of providers (such as dermatologists, chiropractors, and acupuncturists) in managed care networks. (2) Starting in 1995 and 1996, states began to enact laws to address consumer concerns.(3) Hundreds of managed care laws have been enacted. Statutory changes were made to existing laws designed to address insurer insolvency (4) and quality of care. (5) The laws include (in various combinations): (6) (1) liability and appeal provisions--the right to an external review of coverage denials and the right to bring a tort suit against a health plan; (2) provisions affecting choice of and access to providers, such as any-willing-provider laws, point-of-service options, and direct access to specialists; (3) protecting providers from undue influence, such as by limiting physician incentives, banning gag clauses, and giving providers due process rights when they are terminated from a plan; and (4) provisions governing general coverage standards (medical necessity and emergency care) and specific coverage mandates, such as minimum maternity stays. Sources of dissatisfaction with managed care are well-documented. (7) Although most consumers are satisfied with their actual experiences with managed care plans, and the observable quality of care remains high, (8) the public has a generalized concern that managed care plans will lower quality of care, in part by restricting access to beneficial care in an effort to save money for the plan. (9) Such restrictions are thought to take a variety of forms, including restrictions on access to emergency room care, to specialists, and to other costly care that may potentially be beneficial to the plan enrollee. To the extent that real savings are generated, many consumers and physicians believe that such savings accrue to equity holders of the plans' corporate sponsors rather than to reduced premiums for customers. (10) Patients' reactions to managed care strategies, such as gatekeeping, preauthorization of referrals, and financial incentives for physicians depend in part on whether they are construed to improve qua lity of care (considered to be good) or to lower cost (considered to be bad). (11) Physicians complain that they face constraints on care decisions imposed by plans. (12) As with consumers, however, the documented reality is not as bad for physicians as is often portrayed. (13) Providers are also concerned about the discounts that managed care plans are able to negotiate, but the vast majority of statutes address issues of access and quality of care rather than payment. Defenders of managed care respond to these allegations in three ways: (1) they question the validity of the criticisms of managed care; (2) they observe that some of the allegations pertain to health insurance more generally and not just to managed care; and (3) they question whether the cure is more socially desirable than the alleged market failure itself. (14) The general parameters of this debate are well-developed in the literature summarized above. What is less understood is the justification for managed care regulation in terms of well-articulated market failures (rather than simply political responses to public and interest group concerns); also needed is an examination of how well legal enactments and enforcement activities respond to market failure theory. …

The Theory of Market Failure and Equity-Based Policy Making in Contemporary Local Government

Over the past several decades local government has become increasingly complex. Accordingly, local government policy makers can no longer simply rely on intuitive reasoning in the formulation of policy and are now obliged to draw on conceptual frameworks developed in the social sciences, including economics. One such framework is the market failure paradigm which has previously focused exclusively on the question of economic efficiency and local public goods in its application to the local government milieu. This article seeks to extend this model to include sources of market failure which derive from questions of equity as well as efficiency.

A Study of Factors Influencing the Growth of Nonprofits in Social Services

This exploratory study identifies and assesses the significance of factors that contribute to the growth of the nonprofit sector in the field of social services across 285 major metropolitan areas in the United States. Measures derived from social cohesion, demand heterogeneity, market failure, resource dependence, and philanthropic culture theories are introduced to correlation and multiple regression analyses. All but the philanthropic culture measures are positively associated with the growth of the nonprofit sector in social services. Particularly noteworthy are the positive influences that religious cohesion and interdenominational diversity have on numbers of nonprofit social service providers—a finding that reaffirms the historical linkage between religion and voluntary associations. Summary U.S. economic and sociodemographic census data, as well as data from a unique religious census, are analyzed. If a unifying theory of the nonprofit sector is attainable, studies such as this should contribute to laying the empirical building blocks for such a theory.

Inefficiency in public organizations

Theories of market and government failure provide resources for diagnosing intra-organizational inefficiency in public organizations and for identifying possible solutions. Public goods, externalities, information asymmetries, monopolies, uncertainty, inappropriate reward systems, and interest group behavior create inefficiencies within organizations just as they do in the larger economy. Associated with many of these problems are generic solutions that can usefully inform leaders in their efforts to improve efficiency within their public organizations.

Zur Ökonomik grundfinanzierter wirtschafts- und sozial wissenschaftlicher Forschung / The Economics of Public Funding of Economic and Social Research

Zusammenfassung Mit Argumenten aus der „Theorie des Marktversagens“ und der „Neuen Politischen Ökonomie“ kann gezeigt werden, daß Universitäten und Forschungsinstitute spezielle „Öffentliche Güter“ produzieren, die eine Grundfinanzierung durch den Staat unter Effizienzgesichtspunkten rechtfertigen. Allerdings wäre die Produktion solcher wirtschafts- und sozialwissenschaftlicher Forschungsergebnisse durch einen einzigen Typ Forschungseinrichtung suboptimal. Da unterschiedliche Anforderungen an diese Forschungsergebnisse bestehen, ist es möglich, die Effizienz der Forschung durch eine Arbeitsteilung zwischen Universitäten, amtlicher Statistik sowie wirtschafts- und sozialwissenschaftlichen Forschungsinstituten zu steigern. Zugleich steigert Wettbewerb innerhalb der jeweiligen institutionellen Forschungssegmente (einschließlich der Produktion statistischer Daten) Effizienz und Effektivität der Forschung (und Lehre) - mit der Konsequenz, daß ein institutionalisierter „Wettbewerber“ auch ausscheiden können muß, also beispielsweise eine Universität oder ein Forschungsinstitut geschlossen wird. Zu diesem Zweck sind Evaluierungen durch den grundfinanzierenden Staat durchzuführen, weil es sich bei den Forschungsaktivitäten um solche in einem nichtmarktlichen Wettbewerb handelt. Die zugrundeliegenden Evaluierungskriterien müssen dem Tatbestand Rechnung tragen, daß grundfinanzierte Forschung sowohl „selbstbestimmt“ als auch von den Inhalten her „außengesteuert“ ausgerichtet sein kann; aber selbst für vom Markt gesteuerte „reine Auftragsforschung“ ist eine Evaluation deren akademischer Qualität sinnvoll.

Market Failure, Government Failure, Leadership and Public Policy

The economic rationale for government intervention in a market economy has traditionally been provided by the theory of market failure. This article reviews the market failure paradigm in the light of the more recent literature on government failure. One implication of the theory of government failure is that a contractualist approach to public service reform is the best method of improving public sector productivity. However, we argue that this view overlooks the potentially crucial role of leadership in public agencies and the ways in which transformational leadership can stimulate efficiency. We argue that communitarian conceptions of leadership can be incorporated into conventional economic approaches, and that this can have significant implications for public policy formulation.