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Abstract:
The paper integrates the problem of designing bankruptcy rules into a theory of optimal debt structure. We show that in an incomplete-contracting framework with imperfect renegotiation, having multiple creditors increases a firm's debt capacity, while increasing its incentives to default strategically. The optimal debt contract gives creditors claims that are jointly inconsistent in the event of default. Bankruptcy rules, therefore, are a necessary part of the overall financing contract, to make claims consistent and to prevent a value-reducing run for the assets.

Bankruptcy, Debt Structure, Contracts

Abstract:
This paper integrates the problem of designing corporate bankruptcy rules into a theory of optimal debt structure. We show that, in an optimal contracting framework with imperfect renegotiation, having multiple creditors increases a firm's debt capacity while increasing its incentives to default strategically. The optimal debt contract gives creditors claims that are jointly inconsistent in case of default. Bankruptcy rules are therefore a necessary part of the overall financing contract, to make claims consistent and to prevent a value reducing run for the assets of the firm. We characterize these rules, with predictions about the allocation of security rights, the right to trigger bankruptcy and the symmetry of treatment of creditors in default.

Bankruptcy, debt structure, multiple creditors, law and finance

Abstract:
The government's incentives to bail out inefficient projects are determined by the trade-off between political benefits and economic costs, the latter depending on the decentralization of government. Two effects of federalism are derived: First, fiscal competition among local governments under factor mobility increases the opportunity costs of bailout and thus serves as a commitment device, (the "competition effect"). Second, monetary centralization, together with fiscal decentralization, induces a conflict of interests and thus may harden budget constraints and reduce inflation (the "checks and balance effect"). Our analysis is used to interpret China's recent experience of transition to a market economy.

Abstract:
We present a model of electoral accountability to compare the public finance outcomes under a presidential-congressional and a parliamentary system. In a presidential-congressional system, contrary to a parliamentary system, there are no endogenous incentives for legislative cohesion, but this allows for a clearer separation of powers. These features lead to clear differences in the public finance performance of the two systems. A Parliamentary system has redistribution towards a majority, less underprovision of public goods, more waste and a higher burden of taxation, whereas a presidential-congressional system has redistribution towards a minority, more underprovision of public goods, but less waste and a smaller size of government.

Abstract:
We compare results from a pilot study on entrepreneurship in China and Russia. Compared to non-entrepreneurs, Russian and Chinese entrepreneurs have more entrepreneurs in their family and among childhood friends, value work more relative to leisure and have higher wealth ambitions. Russian entrepreneurs have a better educational background and their parents were more likely to have been members of the communist party but Chinese entrepreneurs are more risk-taking and greedy and have more entrepreneurs among their childhood friends.

Abstract:
We compare the results from a survey of 900 entrepreneurs in China and Russia. Compared to a sample of 1,000 non-entrepreneurs, Chinese and Russian entrepreneurs have more family members and childhood friends who started their own businesses. They also have higher wealth ambitions and value work more relative to leisure. Russian entrepreneurs have more education while Chinese entrepreneurs are greedier and more risk-taking.

China, Russia, entrepreneurs

Abstract:
We present a theoretical model of a parliamentary democracy, where party structures, government coalitions and fiscal policies are endogenously determined. The model predicts that, relative to proportional elections, majoritarian elections reduce government spending because they reduce party fragmentation and, therefore, the incidence of coalition governments. Party fragmentation can persist under majoritarian rule if party supporters are unevenly distributed across electoral districts. Economic and political data, from up to 50 post-war parliamentary democracies, strongly support our joint predictions from the electoral rule, to the party system, to the type of government, and to government spending.

Electoral rules, party systems, coalition governments, fiscal policy, electoral accountability

Abstract:
We present a theoretical model of a parliamentary democracy, where party structures, government coalitions and fiscal policies are endogenously determined. The model predicts that, relative to proportional elections, majoritarian elections reduce government spending because they reduce party fragmentation and, therefore, the incidence of coalition governments. Party fragmentation can persist under majoritarian rule if party supporters are unevenly distributed across electoral districts. Economic and political data, from up to 50 post-war parliamentary democracies, strongly support our joint predictions from the electoral rule, to the party system, to the type of government, and to government spending.

electoral rules, party systems, coalition governments, fiscal policy, electoral accountability

Abstract:
We present a theoretical model of a parliamentary democracy, where party structures, government coalitions and fiscal policies are endogenously determined. The model predicts that, relative to proportional elections, majoritarian elections reduce government spending because they reduce party fragmentation and, therefore, the incidence of coalition governments. Party fragmentation can persist under majoritarian rule if party supporters are unevenly distributed across electoral districts. Economic and political data, from up to 50 post-war parliamentary democracies, strongly support our joint predictions from the electoral rule, to the party system, to the type of government, and to government spending.

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Abstract:
Social scientists studying the determinants of entrepreneurship have emphasized three distinct perspectives: the role of institutions, the role of social networks and the role of personal characteristics. We conduct a survey from five large developing and transition economies to better understand entrepreneurship in view of these three perspectives. Using data from a pilot study with over 2,000 interviews in 7 cities across China, we find that controlling for institutional environment entrepreneurs in China are much more likely to have family members who are entrepreneurs as well as childhood friends who became entrepreneurs, suggesting that social environment plays an important role in entrepreneurship. Entrepreneurs also differ strongly from non-entrepreneurs in their attitudes toward risks and their work-leisure preferences, echoing Schumpeter. Finally, failed entrepreneurs score the worst on aptitude tests, but have the best self-reported performance in school and perceive the business environment as least favourable.

Abstract:
It has been increasingly recognized that entrepreneurs play a crucial role in successful economies. Yet research on entrepreneurs is rather limited. In this paper we study 414 Chinese entrepreneurs and 561 Chinese non-entrepreneurs with similar age and education characteristics. We find that entrepreneurs differ strongly from non-entrepreneurs in their attitude towards risk and their work-leisure preferences, echoing Schumpeter. Entrepreneurs are much more likely to have family members who were entrepreneurs as well as childhood friends who became entrepreneurs. Finally, failed entrepreneurs score the worst on aptitude tests yet have the best self-reported performance in school.

China, entrepreneurs

Abstract:
Studies of the determinants of entrepreneurship have emphasized three distinct perspectives: market institutions, social networks and personal characteristics. Using data from a pilot survey with over 2,000 interviews in 7 cities across Russia, we find evidence for a particularly strong effect of social networks: individuals whose relatives and childhood friends are entrepreneurs are more than twice as likely to be entrepreneurs. Mothers' characteristics play a significant role in determining future entrepreneurs.

Abstract:
Studies of the determinants of entrepreneurship have emphasized three distinct perspectives: market institutions, social networks and personal characteristics. Using data from a pilot survey with over 2,000 interviews in 7 cities across Russia, we find evidence for a particularly strong effect of social networks: individuals whose relatives and childhood friends are entrepreneurs are more than twice as likely to be entrepreneurs. Mothers' characteristics play a significant role in determining future entrepreneurs.

Entrepreneurship, Russia

Abstract:

Abstract:
Pareto-improving economic reforms that also simultaneously achieve efficiency can be implemented through a strategy of "dual-track" liberalization. Its success requires the feasibility of the original plan and its continued enforcement by the state. The Chinese experience demonstrates that such a strategy works.

Abstract:
We investigate the impact of U.S. bombing on later economic development in Vietnam. The Vietnam War featured the most intense bombing campaign in military history and had massive humanitarian costs. We use a unique U.S. military dataset containing bombing intensity at the district level (N=584). We compare the heavily bombed districts to other districts controlling for baseline demographic characteristics and district geographic factors, and use an instrumental variable approach exploiting distance to the 17th parallel demilitarized zone. U.S. bombing does not have a robust negative impact on poverty rates, consumption levels, infrastructure, literacy or population density through 2002. This finding suggests that local recovery from war damage can be rapid under certain conditions, although further work is needed to establish the generality of the finding in other settings.

Abstract:
A political constitution is like an incomplete contract: it spells out a procedure for making decisions and for delegating power, without specifying the contents of those decisions. This creates a problem: the appointed policymaker could use this power for his own benefit against the interests of the citizens. In democracies, elections are the primary mechanism for disciplining public officials. But elections are not sufficient. Separation of powers between executive and legislative bodies also helps the voters, in two distinct ways. First, it can elicit information held by the appointed officials and not otherwise available to the voters. Second, by playing one body against the other and by aligning the interest of the weaker body with their own, the voters can induce the two bodies to discipline each other. Separation of power only works to the voters' advantage if it is appropriately designed, however, and it can be detrimental if it creates a "common pool" problem. These advantages of separation of powers are present both in Presidential and in Parliamentary democracies. Government appointment rules in Parliamentary democracies must be appropriately designed, however, to prevent collusion.

Incomplete contracts, information revelation, legislative organization, separation of powers

Abstract:
A political constitution is like an incomplete contract: it spells out a procedure for making decisions and for delegating power, without specifying the contents of those decisions. This creates a problem: the appointed policymaker could use this power for his own benefit against the interests of the citizens. In democracies, elections are the primary mechanism for disciplining public officials. But elections are not sufficient. Separation of powers between executive and legislative bodies also helps the voters in two distinct ways. First, it can elicit information held by the appointed officials and not otherwise available to the voters. Second, by playing one body against the other and by aligning the interest of the weaker body with their own, the voters can induce the two bodies to discipline each other. Separation of power only works to the voters' advantage if it is appropriately designed, however, and it can be detrimentalif it creates a "common pool" problem. These advantages of separation of powers are present both in Presidential and in Parliamentary democracies. Government appointment rules in Parliamentary democracies must be appropriately designed, however, to prevent collusion.

Abstract:
We present a model of bank passivity and regulatory failure. Banks with low equity positions have more incentives to be passive in liquidating bad loans. We show that they tend to hide distress from regulatory authorities and are ready to offer a higher rate of interest in order to attract deposits compared to banks that are not in distress. Therefore, higher deposit rates may act as an early warning signal of bank failure. We provide empirical evidence that the balance sheet information collected by the Czech National Bank is not a better predictor of bank failure than higher deposit rates. This confirms the importance of asymmetric information between banks and the regulator and suggests the usefulness of looking at deposit rate differentials as early signals of distress in emerging market economies where banks. equity positions are often low.

Bank Failures, Bank Supervision, Czech Banking Crisis, Default Risk, Transitional Economies

Abstract:
We present a model of bank passivity and regulatory failure. Banks with low equity positions have more incentives to be passive in liquidating bad loans. We show that they tend to hide distress from regulatory authorities and are ready to offer a higher rate of interest in order to attract deposits compared to banks that are not in distress. Therefore, higher deposit rates may act as an early warning signal of bank failure. We provide empirical evidence that the balance sheet information collected by the Czech National Bank is not a better predictor of bank failure than higher deposit rates. This confirms the importance of asymmetric information between banks and the regulator and suggests the usefulness of looking at deposit rate differentials as early signals of distress in emerging market economies where banks' equity positions are often low.

Bank failures, bank supervision, Czech banking crisis, default risk, transitional economies

Abstract:
We present a simple model to analyze law enforcement problems in transition economies. Law enforcement implies coordination problems and multiplicity of equilibria due to a law abidance and a fiscal externality. We analyze two institutional mechanisms for solving the coordination problem. A first mechanism, which we call "dualism", follows the scenario of Chinese transition where the government keeps direct control over economic resources and where a liberalized non-state sector follows market rules. The second mechanism we put forward is accession to the European Union. We show that accession to the European Union, even without external borrowing, provides a mechanism to eliminate the "bad" equilibrium, provided the "accessing" country is small enough relative to the European Union. Interestingly, we show that accession without conditionality is better than with conditionality because conditionality creates a coordination problem of its own that partly annihilates the positive effects of expected accession.

Accession, coordination problems, dual track, law enforcement

Abstract:
We present a simple model to analyse law enforcement problems in transition economies. Law enforcement implies coordination problems and multiplicity of equilibria due to a law abidance and a fiscal externality. We analyse two institutional mechanisms for solving the coordination problem. A first mechanism, which we call 'dualism', follows the scenario of Chinese transition where the government keeps direct control over economic resources and where a liberalized non-state sector follows market rules. The second mechanism we put forward is accession to the European Union. We show that accession to the European Union, even without external borrowing, provides a mechanism to eliminate the 'bad' equilibrium, provided the 'accessing' country is small enough relative to the European Union. Interestingly, we show that accession without conditionality is better than with conditionality because conditionality creates a coordination problem of its own that partly annihilates the positive effects of expected accession

Accession, coordination problems, dual track, law enforcement

Abstract:
We model the coordination of specialised tasks inside an organisation as "attribute matching". Using this method, we compare the performance of organisational forms (M-form and U-form) in implementing changes such as innovation and reform. In our framework, organisational forms affect the information structure of an organisation and thus the way to coordinate changes. Compared to the U-form, the M-form organisation achieves better coordination but suffers from fewer economies of scale. The distinctive advantage of the M-form is flexibility of experimentation, which allows the organisation to introduce more innovation and reform. The theory is illustrated by the organisational differences between China and the former Soviet Union and sheds light on their different reform strategies, particularly with regard to the prevalence of the experimental approach in China.

Abstract:
This article summarizes research on the analysis of roll call votes in the European Parliament since the European Parliament was elected by universal suffrage and draws lessons about legislative behavior in the European Parliament. The research shows that voting in the European Parliament occurs along supranational party lines and not along geographical lines. Party cohesion has increased with the powers of the European Parliament. This increased cohesion is the reflection of European party discipline based on cohesion of national party groups. Moreover, coalition frequency is related mostly to ideological closeness between party groups. (JEL codes: D72, F53, P 16)

European Parliament, legislative behavior, roll call votes, coalition formation, party discipline

Abstract:
We compare the performance of organizational forms (M-form and U-form) in experimenting with uncertain projects. In our framework, organizational forms affect the information structure of an organization and thus the way to coordinate changes. Compared to the U-form, the M-form organization achieves better coordination in "attribute matching" but suffers from coordination in "attribute compatibility" and less gains in specialization. The distinctive advantage of the M-form is its flexibility in choosing between small-scale and full-scale experimentation.

Abstract:
We develop a simple model to analyse the 'dual-track' approach to transition to a market economy as a mechanism for implementing efficient Pareto-improving economic reform, that is, reform achieving efficiency without creating losers. The approach, based on the continued enforcement of the existing plan while simultaneously liberalizing the market, can be understood as a method for making implicit lump-sum transfers to compensate potential losers of the reform. The model highlights the critical role of enforcement of the plan and full liberalization of the market track. We examine how the dual-track approach has worked in product and labour markets in China's economic reform in practice.

Abstract:
We compare organizational forms (U-form and M-form) in coordinating changes such as innovations in business firms and reforms in transition economies. In our model, organizational forms affect the information structure of an organization, and thus the way to coordinate changes and to experiment proposals for innovation. Compared to the U-form, the M-form organization achieves better coordination but also involves higher costs due to a lack of scale economies. Dynamically, the M-form has a distinct advantage in lowering the costs of experimentation. Our analysis sheds light on the effect of the organizational structure of business firms on their propensity to innovate. It also applies to transition economies where we observe strikingly different organizational structures between the Central and Eastern European and the former Soviet Union economies (the U form) and the Chinese economy (the M-form). We relate these differences in organizational structure to differences in reform strategy: the 'big-bang' reform approach in the former and the 'experimental' or 'gradual' reform approach in the latter.
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Abstract:
We present a model to explain why in the transition economies of Central and Eastern Europe an important output fall has been associated with price liberalization. Its key ingredients are search frictions and Williamsonian relation-specific investment, implying that new investments are made only after having found a new long-term partner. When all firms search for new partners, output may fall because of three effects: a) disruption of previous production links, b) a fall in investment, and c) capital depreciation due to the absence of replacement investment. We show that forms of gradual liberalization like the Chinese "dual-track" price liberalization may avoid the transitory output fall.

Abstract:
This paper presents a model that explains why in the transition economies of Central and Eastern Europe an important output fall has been associated with price liberalization. Its key ingredients are search frictions and Williamsonian relation-specific investment implying that new investments are made only after a new long-term partner has been found. When all firms search for new partners, output may fall because of three effects: a) disruption of previous production links; b) a fall in investment; and c) capital depreciation due to the absence of replacement investment. We show that forms of gradual liberalization like the Chinese 'dual-track' price liberalization may avoid or reduce the transitory output fall.

Abstract:
We set up a dynamic adverse selection model to explain how career concerns may induce managers in state-owned enterprises (SOEs) to restructure their firms. It is shown how government monopsony power over managers led to the ratchet effect under the socialist economy, even under reforms coming short of privatization. The introduction of a managerial labour market, through privatization, introduces competition for managers and eliminates the ratchet effect, thereby inducing managers to restructure. Prospects of privatization also provide incentives to restructure even when managerial skills are asset-specific, provided insider control is strong enough to give managers enough rents from privatization. The model is consistent with the empirical evidence on restructuring of SOEs in transition economies.

Abstract:
A main question regarding public finance is how well democratic institutions align the interest of voters and the incentives of self-interested politicians. It has been observed that fiscal policy reflects any incentive present in political institutions. In this paper we summarize a recent line of research attempting to provide such micro-political foundations. In a Presidential-Congressional Political System we have separation of powers, whereas in a Parliamentary System the main feature is legislative cohesion. The principal results of separation of powers are a smaller size of government and lower waste: analyzing legislative cohesion we find that there is a more equal distribution, but more waste and higher taxes.

Abstract:
Observed fiscal policy reflects the incentives embedded in political institutions. In this paper, we illustrate the effects of two general institutional features: separation of powers, which is common in Presidential-Congressional political systems, and legislative cohesion, which is typical of parliamentary systems. Compared to a simple legislative game, separation of powers brings about a smaller size of government and lower waste, whereas legislative cohesion induces a more equal distribution, but more waste and higher taxes.

Abstract:
We analyze the problem of soft budget constraints of enterprises financed by banks in transition economies and review the similarities and the differences in various models addressing that issue. We reconstruct these models as several variants of a basic sequential model of soft budget constraints. In each case, we analyze both the sources of the soft budget constraint and the mechanisms for hardening budget constraints, including the policy implications of the analysis. Despite various mechanisms and channels for soft budget constraints, all models share the same sequential structure where soft budget constraints arise due to the endogenous lack of credibility for liquidation of a project instead of continuation and refinancing. All share the same feature that mechanisms for hardening are mechanisms for endogenously restoring such a credibility for liquidation.

Abstract:
This paper develops a model of the breakup or unification of nations. In each nation the decision to separate is taken by majority voting. A basic trade-off between the efficiency gains of unification and the costs in terms of loss of control on political decisions is highlighted. The model emphasizes political conflicts over redistribution policies. The main results of the paper are i) when income distributions vary across regions and the efficiency gains from unification are small, separation occurs in equilibrium; and ii) when all factors of production are perfectly mobile, all incentives for separation disappear.

Abstract:
We develop a simple model to analyse the 'dual-track' approach to transition to a market economy as a mechanism for implementing efficient Pareto-improving economic reform, that is, reform achieving efficiency without creating losers. The approach, based on the continued enforcement of the existing plan while simultaneously liberalizing the market, can be understood as a method for making implicit lump-sum transfers to compensate potential losers of the reform. The model highlights the critical role of enforcement of the plan and full liberalization of the market track. We examine how the dual-track approach has worked in product and labour markets in China's economic reform in practice.

Abstract:
Political constitutions are incomplete contracts and therefore leave room for abuse of power. In democracies, elections are the primary mechanism for disciplining public officials, but they are not sufficient. Separation of powers between executive and legislative bodies also helps to prevent the abuse of power, but only with appropriate checks and balances. Checks and balances work by creating a conflict of interest between the executive and the legislature, yet requiring both bodies to agree on public policy. In this way, the two bodies discipline each other to the voters' advantage. Under appropriate checks and balances, separation of powers also helps the voters elicit information.

Abstract:
The paper addresses the issue of the optimal speed of economy-wide restructuring from a state-owned to a privately-owned economy. The analysis is led from a general equilibrium perspective, focusing on the role of endogenously generated capital accumulation. Sensitivity of the optimal speed of transition is performed with respect to preferences and technology. It is found in particular that adverse productivity shocks to the state sector, occuring early on in transition tend to create macroeconomic contraction and slow down investment and the speed of transition. Such shocks tend to accelerate transition if they occur at a later stage, however. This may shed light on the effect of adverse productivity shocks on output contraction in the early phase of transition in Central and Eastern Europe.

Abstract:
Political constitutions are incomplete contracts and therefore leave scope for abuse of power. In democracies, elections are the primary mechanism for disciplining public officials, but they are not sufficient. Separation of powers between executive and legislative bodies also helps prevent the abuse of power but only with appropriate checks and balances. Checks and balances work by creating a conflict of interests between the executive and the legislature, yet requiring both bodies to agree on public policy. In this way, the two bodies discipline each other at the voters' advantage. Under appropriate checks and balances, separation of powers also helps the voters elicit information.

Abstract:
We present a model of large-scale economic reforms, modeled on the transition process in Eastern Europe, with aggregate and individual uncertainty concerning the outcome of reforms. The government is assumed to choose the speed and sequencing of reforms. We compare big-bang strategies with gradualist reform packages. We show that (i) gradualist reform packages may be easier to get started, (ii) optimal sequencing of reforms should aim at creating constituencies for further reforms, and (iii) gradualism may generate a higher investment response because of a lower option value of waiting than a big-bang approach would have.