Self-enforcing Mechanism Research Articles

The nuclear Argonaute HRDE-1 directs target gene re-localization and shuttles to nuage to promote small RNA-mediated inherited silencing

Argonaute/small RNA pathways and heterochromatin work together to propagate transgenerational gene silencing, but the mechanisms behind their interaction are not well understood. Here, we show that induction of heterochromatin silencing in C.elegans by RNAi or by artificially tethering pathway components to target RNA causes co-localization of targetalleles in pachytene nuclei. Tethering the nuclear Argonaute WAGO-9/HRDE-1 induces heterochromatin formation and independently induces small RNA amplification. Consistent with this finding, HRDE-1, while predominantly nuclear, also localizes to peri-nuclear nuage domains, where amplification is thought to occur. Tethering a heterochromatin-silencing factor, NRDE-2, induces heterochromatin formation, which subsequently causes de novo synthesis of HRDE-1 guide RNAs. HRDE-1 then acts to further amplify small RNAs that load on downstream Argonautes. These findings suggest that HRDE-1 plays a dual role, acting upstream to initiate heterochromatin silencing and downstream to stimulate a new cycle of small RNA amplification, thus establishing a self-enforcing mechanism that propagates gene silencing to future generations.

Overclaimed refunds, undeclared sales, and invoice mills: Nature and extent of noncompliance in a value-added tax

Value-added tax has seen phenomenal expansion in recent decades. Its appeal in part lies in its robustness to tax evasion relative to other tax instruments. Exploiting a tax reform from Pakistan that cuts the tax rate on five major industries of the country substantially, I estimate the size and nature of VAT evasion in the treated industries, finding that it ranges from 31–46% of the potential revenue. One important channel through which the evasion occurs is the overclaim of refunds, which constitute 11–23% of the potential revenue. Roughly two-fifths of the overclaimed refund is based on spurious invoices issued by invoice mills. Qualitatively, noncompliance is stronger in the latter stages of the supply chain, but it runs deep inside the chain, suggesting that on their own the self-enforcement mechanisms built into a VAT do not deter tax evasion fully.

Reputation Effect on Contract Choice and Self-Enforcement: A Case Study of Farmland Transfer in China

The prevailing informal contracts of farmland transfer in China are facing frequent disputes and defaults, which call for effective self-enforcement mechanisms operating through transactors’ reputations and social networks. However, the effects of reputation on contract choice and self-enforcement have not been thoroughly considered and examined by existing research in the case of farmland transfer. This study explores the reputation’s ex-ante signaling effect on farmers’ contract choices and the ex-post penalty effect on farmers’ performance in informal contracts. Based on 403 transfer contracts obtained from a field survey conducted in the Hebei province of China, we apply the multinomial logit model and Heckman probit model to perform empirical analysis. The results show that, affected by the penalty effect, farmers with good reputations are more likely to fulfill informal contracts to avoid reputation damage and the resulting loss of future trading opportunities. However, in the ex-ante stage of contract choice, a farmer’s reputation has no significant signaling effect on the formation of informal contracts. The informal contracts are chosen due to farmers’ trust in the close social network and the demand for reduced transaction costs. These findings highlight the importance of personal reputation serving as a form of relational governance in the self-enforcement of informal contracts, which provides a means of enhancing the informal contract’s effectiveness in terms of farmland transfer in the rural acquaintance society. It also provides insights into the necessity of creating a supportive environment for informal rules. Policies should encourage the building of personal reputation and establishment of good social norms to form a long-term, stable and reasonable contractual relationship for farmland transfer.

Mechanism Design with Blockchain Enforcement

We study the design of self-enforcing mechanisms that rely on neither a trusted third party (e.g., court, trusted mechanism designer) nor a long-term relationship. Instead, we use a smart contract written on blockchains as a commitment device. We design the digital court, a smart contract that identifies and punishes agents who reneged on the agreement. The digital court substitutes the role of legal enforcement in the traditional mechanism design paradigm. We show that any agreement that is implementable with legal enforcement can also be implemented with enforcement by the digital court. To pursue a desirable design of the digital court, we study a way to leverage truthful reports made by a small fraction of behavioral agents. Our digital court has a unique equilibrium as long as there is a positive fraction of behavioral agents, and it gives correct judgment in the equilibrium if honest agents are more likely to exist than dishonest agents. The platform for smart contracts is already ready in 2020; thus, self-enforcing mechanisms proposed in this paper can be used practically, even now. As our digital court can be used for implementing general agreements, it does not leak the detailed information about the agreement even if it is deployed on a public blockchain (e.g., Ethereum) as a smart contract.

Communications, Caching, and Computing for Next Generation HetNets

To accommodate the dramatically increasing traffic demand, some of the intermediate nodes within HetNets should be endowed with storage and computation capabilities for facilitating pervasive computation service and massive content delivery. ICN and MEC are recognized as two promising techniques, with which content can be cached and computed in close proximity to mobile devices. These advanced techniques enable Het-Nets to accommodate and support more mobile users, but also bring challenges of architecture deployment and resource deployment. Along these lines, the first part of this article offers a novel joint architecture of communications, caching, and computing for HetNets based on wireless network virtualization with software defined networking, where ICN and MEC support each other to promote network performance and guarantee different types of business demands. Based on the integrated framework, we further present two different self-enforcing mechanisms (i.e., a caching-assisted MEC approach and a computing-assisted ICN approach) to achieve mutual promotion between caching and computing. Against this background, the second part of this article offers virtual multi-resource deployment for both uplink and downlink scenarios to evaluate a three-way trade-off among communication, caching, and computing revenues. The results demonstrate our hypothesis on the utilization of the mutual promotion between ICN and MEC to improve the overall performance of future wireless systems.

Locking in Fair Weather Friends: Assessing the Fate of Chinese Communist Elite When Their Patrons Fall from Power

A growing literature shows robust evidence that patronage by high level politicians greatly enhanced officials’ chance of promotion in the largest one-party dictatorship in the world, China. There has been few works on whether patrons’ exits, even when they were retirements, had an impact on a followers’ career prospects. This question concerns the core theoretical issue of whether factional ties are self-enforcing mechanisms. That is, patron-client relationships are only useful for patrons if they knew that clients would suffer if they fell from power. This mechanism creates strong incentives for clients to engage in political struggle on behalf of their patrons, regardless of the patrons’ monitoring capacity. We control for a range of unobserved heterogeneity and show that patrons’ exits from the political elite had a significantly negative impact on a clients’ chance of promotion and also diminished their chance of retaining their incumbent positions.

Information Consumption and Strategic Voting: Evidence from Brazil

In a seminal work about strategic voting, Duverger suggested that single-ballot electoral systems generate incentives for voters to behave strategically, which ultimately might lead to two-party systems. Dual-ballot electoral systems, in turn, allow voters to behave sincerely, which might favors multi-party systems. Even though several works have found results consistent with strategic voting behavior, some findings also suggest that not all voters behave the same way. This leads to the question on who exactly are the voters behaving strategically and, more importantly, why some voters do not behave this way. This paper investigates whether voters with different access to information behave differently when choosing their candidates in Brazilian mayoral elections. Following the theoretical literature, we predict that voters with lower availability of information are more likely to behave sincerely while voters with a higher information level are more likely to behave in a strategic way. We test this prediction exploiting an exogenous variation in Brazilian electoral rules and using a unique database with information disaggregated at the polling station level, that allow us to identify votes and characteristics of small groups of voters. Our results show that strategic behaviour indeed varies greatly depending on voters access to information. We also show that both demand for information (measured by voters’ level of education) and supply of information (measured by media availability at municipalities) are self-enforcing mechanisms for strategic voting. Therefore, whether a voter behaves strategically or not depends on both her ability to gather information and the availability of such information in her municipality.

An Empirical Analysis of Self-Enforcement Mechanisms: Evidence from Hotel Franchising

The relational contracts literature suggests that a principal can improve contract self-enforceability by specifying initial requirements that increase the agent’s ex post rents. Initial requirements specified in hotel franchise agreements—size and quality tier of the hotel—offer a unique empirical setting to test this. Using proprietary data on 5,547 new franchised hotels and their revenues, we find that hotels far away from their franchisor’s headquarters are larger, more likely to belong to a high quality tier, and generate higher revenues ex post. This supports the idea that the agent’s ex post rents can serve as a substitute to the principal’s monitoring intensity in the mitigation of agency problems. Our findings shed light on how formal contract terms can influence informal (relational) contracts between business partners. This paper was accepted by Bruno Cassiman, business strategy.

An Empirical Analysis of Self-Enforcement Mechanisms: Evidence from Hotel Franchising

The relational contracts literature suggests that a principal can improve contract self-enforceability by specifying initial requirements that increase the agent’s ex-post rents. Initial requirements specified in hotel franchise agreements — size and quality-tier of hotel — offer a unique empirical setting to test this. Using proprietary data on 5,547 new franchised hotels and their revenues, we find that hotels far away from their franchisor’s headquarters are larger, more likely to belong to a high-quality tier, and generate higher revenues ex-post. This supports the idea that the agent’s ex-post rents can serve as a substitute to the principal’s monitoring intensity in the mitigation of agency problems. Our findings shed light on how formal contract terms can influence informal (relational) contracts between business partners.

International Law and the Limits of Macroeconomic Cooperation

The macroeconomic policies of states can produce significant costs and benefits for other states, yet international macroeconomic cooperation has been one of the weakest areas of international law. We ask why states have had such trouble cooperating over macroeconomic issues, when they have been relatively successful at cooperation over other economic matters such as international trade. We argue that although the theoretical benefits of macroeconomic cooperation are real, in practice it is difficult to sustain because optimal cooperative policies are often uncertain and time variant, making it exceedingly difficult to craft clear rules for cooperation in many areas. It is also often difficult or impossible to design credible self-enforcement mechanisms. Recent cooperation on bank capital standards, the history of exchange rate cooperation, the European monetary union, and the prospects for broader monetary and fiscal cooperation are all discussed. We contrast the reasons for successful cooperation on international trade policy.

Normative conflict and feuds: The limits of self-enforcement

A normative conflict arises when multiple plausible rules exist, specifying how one ought to behave in a given situation. In such cases, enforcing one normative rule can lead to a sequence of mutual retaliatory sanctions, which we refer to as a feud. We investigate the hypothesis that normative conflict enhances the likelihood of a feud in a public-good experiment. Normative conflict in our experiment arises from the fact that individuals derive different benefits from the public good. We find that punishment is much more likely to trigger counter-punishment and start a feud when there is a normative conflict, than it is in a setting in which all individuals derive the same benefit from the public good and no such conflict exists. While the possibility of a feud sustains cooperation, the cost of feuding fully offsets the efficiency gains from increased cooperation. Our results point to an important limitation of self-enforcement mechanisms.

An Industry-Specific VAT in Michigan - Objective Valuation in the Retail Gasoline Trade

New York adopted an industry-specific value added tax (VAT) to solve problems with virtual intermediaries (room remarketers) under its hotel accommodations tax. The New York VAT resembles the VAT used in the European Union (EU). It is a credit-invoice VAT that subjectively values supplies. Michigan has also adopted an industry-specific credit-invoice VAT, however the targeted industry is the retail gasoline trade. The valuation method is objective, rather than subjective. In valuing supplies objectively rather than subjectively, the Michigan VAT resembles the exception provisions that are found in most VATs around the globe. Objective valuations are used in VATs when dealing with inherently problematical transaction types. The central point is that Michigan, like New York, has departed from the traditional American approach of taxing consumption in a single stage (directly from the consumer through a retail sales tax). Michigan is doing this because it wants to capture the administrative benefits of utilizing a multi-stage levy. What New York and Michigan are interested in securing is: a larger and more stable and revenue flow through the VAT’s fractioned payment mechanism, and a more easily audited tax regime through a leveraging of the VAT’s self-enforcement mechanisms.

Enforcement of nineteenth century banking contracts using a marriage rule

► The paper studies the self-enforcement mechanisms used by the Chettiar banking caste. ► Provides a new historical instance of self-enforced order in a large banking system. ► Represents an application of rational choice theory to caste as a social institution. ► The functioning of caste appears as vital to trade and prosperity in this case. The enforcement of financial and banking contracts is commonly thought to lie within the domain of government law provision. This paper analyzes a case of self-enforcing financial contracts within a banking system in nineteenth century South India. The Chettiars, a merchant-banking caste, relied on religious homogeneity as well as an endogamous marriage rule, whereby members only married others from within the community, to enforce banking contracts within their system. Widely acknowledged to have been an important source of credit locally and throughout South East Asia, this paper describes and analyzes the enforcement mechanisms at work, in the absence of government involvement. Apart from presenting a new case of self-enforced financial contracts, this paper also represents a novel approach to interpreting the social institution of caste, as seen through the rational choice framework.

In praise of small things: securitization and governance structure

In the aftermath of the 2007-2008 financial crisis, the public asks for action on the basis of ‘macro’ solutions.  This article proposes to take a ‘micro’ view, and examine basic questions about the way securitization transactions (a major element in the crisis) were actually structured, and how investors’ interests were protected. In so doing, it compares the law in countries such as the USA, UK, Spain, France, Italy, Luxembourg or Portugal. The article reaches the conclusion that deals that were very complex and sophisticated, lacked effective internal self-enforcing mechanisms, which, in the view of the asymmetry of information between sponsors/underwriters and investors, were necessary. By making some proposals for reform, it tries to open a debate on the need to revitalize securitization markets by changing the way transactions work from the inside-out.

Lies of Capital Lines

In this paper we examine in detail the qualitative effects caused by the investors sensitivity to mark-to-market and price of liquidity. This distorts CAPM-like portfolio construction causing the Capital Line to become curved and eventually inverted. We show that in the world of strongly concave and non-monotonous Capital Lines, pushing up return targets results in increasing risk but not in increasing return. This is due to the decreasing and eventually negative marginal returns per unit of risk. By chasing returns and prompting investment managers to deliver unsustainable performance, the investment community damages its own chances through a greedy search for yield. Besides negatively skewing the risk-return characteristics, this also amplifies destabilizing pro-cyclical dynamics and increases the component of volatility, which is not accompanied by corresponding return. The latter has profound consequences for investment management and economic policy making. We examine the influence of non-linearity of the Capital Line on the cyclical volatility of capital market and short optionality (negative gamma) profile, implicitly embedded in classical investment approach. We show how to mitigate this negative effect by including long volatility funds in the investment portfolio. We also discuss adverse selection bias among investment managers, created by the investors demand for high unsustainable returns. Since one can only hope that the behaviour of either capital allocators or investment managers will change, we argue that it is left up to regulators to take measures to limit the use of credit and leverage, and to control the self-enforcing mechanism of market destabilization.

Determinants of Corporate Environmental Measures: Public Policy, Community Pressure and Self-Enforcement

Drawing upon data collected from over 4,000 manufacturing facilities across the OECD this paper examines the factors which determine the likelihood of having undertaken significant measures with respect to air pollution, wastewater effluent, and solid waste. The roles played by the public policy framework, informal stakeholder pressures, and internal management practices are examined. While the role of public policy (perceived stringency and inspection frequency) is significant, an important role is also played by self-enforcement mechanisms through environmental management. Stakeholder pressures are not significant, except in the case of employees.

A Comparison of Emission Taxes and Permit Markets for Controlling Correlated Externalities

This paper provides an answer to the question: Are emission taxes an efficient and self-enforcing mechanism to control correlated externality problems? By “correlated externalities” we mean multiple pollutants that are jointly produced by a single source but cause differentiated regional and global externalities. By “self-enforcing” we mean a mechanism that accounts for the endogeneity that exists between competing jurisdictions in the setting of environmental policy within a federation of regions. This mechanism incorporates sequential decision making among the jurisdictions and therefore determines an equilibrium based on the concept of subgame perfection. We find that, unlike joint domestic and international tradable permit markets, joint emission taxes and a hybrid scheme of permits and taxes are neither efficient nor self-enforcing.

The Role of Hostages in Establishing Venture Capital Networks

A vital part of the modern equity capital market, venture capital often finances the riskiest, most innovative ventures. It is also among the more primitive segments of the capital market, subject to very little regulatory oversight and precious few formal institutions. Yet somehow, venture capital investors seem to thrive in this environment, cooperating in investment syndicates despite extreme asymmetric information. This paper examines historical venture capital data to understand how informal networks grew and stabilized. The analysis suggests that, as expected, repeated interaction helps hold networks together. But hostage exchange also plays a role; venture capitalists take turns as leader (informed) and follower (uninformed) in successive deals where, as followers, their investments serve as hostages that can be withheld if they cheat, while acting as leader, in other deals. As the self-enforcing mechanism preferred by East Coast venture capitalists, hostage exchange may offer some insight into older, more formal capital market institutions, including stock exchanges. On the other hand, West Coast venture capitalists (just 10% of all venture capitalists in 1970) appear to have had an alternative, possibly social, means for facilitating network formation.

An efficient mechanism to control correlated externalities: redistributive transfers and the coexistence of regional and global pollution permit markets

We examine joint tradable permit markets as a self-enforcing mechanism to control correlated externality problems. By “correlated” we mean multiple pollutants that are jointly produced by a single source but which simultaneously cause differentiated regional and global externalities (e.g. smog and global warming). By “self-enforcing” we mean a mechanism that accounts for the endogeneity that exists between competing jurisdictions in the setting of environmental policy within a federation of regions. We find that joint domestic and international permit markets are Pareto efficient for a wide class of preferences.

On the Enforcement of Cooperative Environmental Policies

This paper investigates the sustainability of Pareto optimal policies for the replenishment of renewable resources shared by two countries with asymmetrical wealth. It does so within a two-country neoclassical growth model with externality. In the absence of commitment, it identifies simple self-enforcing mechanisms that implement social optima for a typical international resource (clean air) and a parametrization of the model to the United States and a country five times poorer. Such mechanisms are trigger strategies involving transfers of wealth between countries and threats of economic isolation in case of defection. Necessary transfers can represent up to 2.6% of U.S. wealth. Journal of Economic Literature Classification Numbers: Q20, C73, C68