Is ENP good news for the transfer of environmental norms? Incentives and socialization for Eastern neighbours

The launching of the European Neighbourhood Policy has created some expectations. Cooperation between the EU and its partners is expected to get deeper, to the point that neighbouring countries have been promised to share “everything but institutions” with the EU. Moreover, cooperation is also expected to be broader, as it has been presented as including more and more issue areas. In other words, the ENP has the vocation of being a universal instrument to promote the transfer of EU norms. This paper focuses on one single issue area, the environment, and one group of ENP partners, the Western Newly Independent States and the South Caucasus, to revise to what extent neighbourhood policy can provide the mechanisms to encourage rule transfer. Are incentives and disincentives powerful enough? Can the ENP promote the socialization of neighbours into EU environmental norms?

Networks in Argentine agriculture: a multiple-case study approach

Argentina is among the four largest producers of soybeans, sunflower, corn, and wheat, among other agricultural products. Institutional and policy changes during the 1990s fostered the development of Argentine agriculture and the introduction of innovative process and product technologies (no-till, agrochemicals, GMO, GPS) and new investments in modern, large-scale sunflower and soybean processing plants. In addition to technological changes, a "quiet revolution" occurred in the way agricultural production was carried out and organized: from self-production or ownership agriculture to a contract-based agriculture. The objective of this paper is to explore and describe the emergence of networks in the Argentine crop production sector. The paper presents and describes four cases that currently represent about 50% of total grain and oilseed production in Argentina: "informal hybrid form", "agricultural trust fund", "investor-oriented corporate structure", and "network of networks". In all cases, hybrid forms involve a group of actors linked by common objectives, mainly to gain scale, share resources, and improve the profitability of the business. Informal contracts seem to be the most common way of organizing the agriculture process, but using short-term contracts and sequential interfirm collaboration. Networks of networks involve long-term relationships and social development, and reciprocal interfirm collaboration. Agricultural trust fund and investor-oriented corporate structures have combined interfirm collaboration and medium-term relationships. These organizational forms are highly flexible and show a great capacity to adapt to challenges; they are competitive because they enjoy aligned incentives, flexibility, and adaptability.

Power and selection of contract terms: The case from the Brazilian orange juice sector

ABSTRACT We propose a model to explain how contract terms are selected in the presence of a form of economic power: contract power. The orange juice sector is used to illustrate an analysis that demonstrates the effects of contract power on the economic organization of the sector. We define contract power as the ability to exploit contractual gaps or failures of contractual provisions, which are strategically left incomplete. Empirical evidence from content analysis of antitrust documents supports the logic of contract power in the orange juice sector in three forms: avoiding changes to payment methods from weight to solid contents (quality); using information asymmetries to manipulate indexes that calculate the formula of orange prices; and deliberately harvesting oranges late in order to dehydrate the fruit, which consequently reduces weight and price. The paper contributes to understanding the selection of contract terms and the debate about how antitrust offices can deal with this issue.

Tax incentives and direct support for R&D: What do firms use and why?

This paper studies whether firms' use of R&D subsidies and R&D tax incentives is correlated to two sources of underinvestment in R&D, financing constraints and appropriability. We find that financially constrained SMEs are less likely to use R&D tax credits and more likely to obtain subsidies. SMEs using legal methods to protect their intellectual property are more likely to use tax incentives. Results are ambiguous for large firms. For both having previous experience in R&D increases the likelihood of using tax incentives, while it reduces the likelihood of using exclusively subsidies, suggesting that the latter induce entry into R&D. Results imply that direct funding and tax credits do not have the same ability to address each source of R&D underinvestment, and that on average subsidies may be better suited than tax credits at least for SMEs. From a policy perspective these tools may be complements rather than substitutes.

How does ownership structure invfluence bank risk? Analyzing the role of managerial incentives

This paper analyzes how ownership concentration and managerial incentives influences bank risk for a large sample of US banks over the period 1997-2007. Using 2SLS simultaneous equations models, we show that ownership concentration has a positive total effect on bank risk. This is the result of a positive direct effect, which reflects monitoring and opportunistic behavior, and a negative indirect effect, which works through the design of managerial incentive contracts and reflects shareholder preferences toward risk. Large shareholders reduce bank risk by reducing the sensitivity of CEO wealth to stock volatility (Vega) and by increasing the CEO pay-performance sensitivity (Delta). In addition, we show that the direct and indirect effect of ownership concentration on bank risk depends on the type of the largest shareholder (a family, a bank, a corporation or an institutional investor), as well as, on the total shareholding held by each type as a group. Our results suggest that the positive relation between ownership concentration and risk is not the result of preferences towards more risk. Rather, they point at opportunistic behavior of large shareholders.

Do Financial Incentives Affect Firms' Demand For Disabled Workers?

A number of OECD countries aim to encourage work integration of disabled persons using quota policies. For instance, Austrian firms must provide at least one job to a disabled worker per 25 nondisabled workers and are subject to a tax if they do not. This "threshold design" provides causal estimates of the noncompliance tax on disabled employment if firms do not manipulate nondisabled employment; a lower and upper bound on the causal effect can be constructed if they do. Results indicate that firms with 25 nondisabled workers employ about 0.04 (or 12%) more disabled workers than without the tax; firms do manipulate employment of nondisabled workers but the lower bound on the employment effect of the quota remains positive; employment effects are stronger in low-wage firms than in high-wage firms; and firms subject to the quota of two disabled workers or more hire 0.08 more disabled workers per additional quota job. Moreover, increasing the noncompliance tax increases excess disabled employment, whereas paying a bonus to overcomplying firms slightly dampens the employment effects of the tax.

Labeling Regulations and Segregation of First- and, Second-Generation Genetically Modified Products: Innovation Incentives and Welfare Effects, April 2005

We review some of the most significant issues and results on the economic effects of genetically modified (GM) product innovation, with emphasis on the question of GM labeling and the need for costly segregation and identity preservation activities. The analysis is organized around an explicit model that can accommodate the features of both first-generation and second-generation GM products. The model accounts for the proprietary nature of GM innovations and for the critical role of consumer preferences vis-à-vis GM products, as well as for the impacts of segregation and identity preservation and the effects of a mandatory GM labeling regulation. We also investigate briefly a novel question in this setting, the choice of “research direction”when both cost-reducing and quality-enhancing GM innovations are feasible.

The Generational contract in the family : explaining regime differences in financial transfers from parents to children in Europe

The exchange of social and economic support between the generationsis one of the main pillars of both family life and welfare systems. Thedebate on how to reform the generational contract is still truncated, however, by focusing on its public dimension only, especially on pensions and health care provisions. For a full account, the transfer of resources between adult generations in the family needs to be included as well. In our previous research we have shown that intergenerationalexchange is more likely to take place but less intense in the Nordicwelfare regime than in the Continental and Southern ones. In thepresent paper we analyze the social mechanisms that create and explain this nexus between patterns of intergenerational transfers and welfare regimes. The notion that Southern European family support networksare stronger and more effective than those of Continental and Northern European countries is only partially confirmed. In Southern (and partly in Continental) countries, children are mostly supported by means of co-residence with their parents till their complete economicindependence. However, once they have left the parental home thereare fewer transfers; support tends to be restricted to children who have special needs (such as for the formation of their own family), and depends more on their parents’ resources. In the Nordic countries, in contrast, transfers are less driven by children’s needs and parentalresources.

Financial Markets and Real Ecinomy: Four Essays in International Trade

Financial markets play an important role in an economy performing various functions like mobilizing and pooling savings, producing information about investment opportunities, screening and monitoring investments, implementation of corporate governance, diversification and management of risk. These functions influence saving rates, investment decisions, technological innovation and, therefore, have important implications for welfare. In my PhD dissertation I examine the interplay of financial and product markets by looking at different channels through which financial markets may influence an economy.My dissertation consists of four chapters. The first chapter is a co-authored work with Martin Strieborny, a PhD student from the University of Lausanne. The second chapter is a co-authored work with Melise Jaud, a PhD student from the Paris School of Economics. The third chapter is co-authored with both Melise Jaud and Martin Strieborny. The last chapter of my PhD dissertation is a single author paper.Chapter 1 of my PhD thesis analyzes the effect of financial development on growth of contract intensive industries. These industries intensively use intermediate inputs that neither can be sold on organized exchange, nor are reference-priced (Levchenko, 2007; Nunn, 2007). A typical example of a contract intensive industry would be an industry where an upstream supplier has to make investments in order to customize a product for needs of a downstream buyer. After the investment is made and the product is adjusted, the buyer may refuse to meet a commitment and trigger ex post renegotiation. Since the product is customized to the buyer's needs, the supplier cannot sell the product to a different buyer at the original price. This is referred in the literature as the holdup problem. As a consequence, the individually rational suppliers will underinvest into relationship-specific assets, hurting the downstream firms with negative consequences for aggregate growth. The standard way to mitigate the hold up problem is to write a binding contract and to rely on the legal enforcement by the state. However, even the most effective contract enforcement might fail to protect the supplier in tough times when the buyer lacks a reliable source of external financing. This suggests the potential role of financial intermediaries, banks in particular, in mitigating the incomplete contract problem. First, financial products like letters of credit and letters of guarantee can substantially decrease a risk and transaction costs of parties. Second, a bank loan can serve as a signal about a buyer's true financial situation, an upstream firm will be more willing undertake relationship-specific investment knowing that the business partner is creditworthy and will abstain from myopic behavior (Fama, 1985; von Thadden, 1995). Therefore, a well-developed financial (especially banking) system should disproportionately benefit contract intensive industries.The empirical test confirms this hypothesis. Indeed, contract intensive industries seem to grow faster in countries with a well developed financial system. Furthermore, this effect comes from a more developed banking sector rather than from a deeper stock market. These results are reaffirmed examining the effect of US bank deregulation on the growth of contract intensive industries in different states. Beyond an overall pro-growth effect, the bank deregulation seems to disproportionately benefit the industries requiring relationship-specific investments from their suppliers.Chapter 2 of my PhD focuses on the role of the financial sector in promoting exports of developing countries. In particular, it investigates how credit constraints affect the ability of firms operating in agri-food sectors of developing countries to keep exporting to foreign markets.Trade in high-value agri-food products from developing countries has expanded enormously over the last two decades offering opportunities for development. However, trade in agri-food is governed by a growing array of standards. Sanitary and Phytosanitary standards (SPS) and technical regulations impose additional sunk, fixed and operating costs along the firms' export life. Such costs may be detrimental to firms' survival, "pricing out" producers that cannot comply. The existence of these costs suggests a potential role of credit constraints in shaping the duration of trade relationships on foreign markets. A well-developed financial system provides the funds to exporters necessary to adjust production processes in order to meet quality and quantity requirements in foreign markets and to maintain long-standing trade relationships. The products with higher needs for financing should benefit the most from a well functioning financial system. This differential effect calls for a difference-in-difference approach initially proposed by Rajan and Zingales (1998). As a proxy for demand for financing of agri-food products, the sanitary risk index developed by Jaud et al. (2009) is used. The empirical literature on standards and norms show high costs of compliance, both variable and fixed, for high-value food products (Garcia-Martinez and Poole, 2004; Maskus et al., 2005). The sanitary risk index reflects the propensity of products to fail health and safety controls on the European Union (EU) market. Given the high costs of compliance, the sanitary risk index captures the demand for external financing to comply with such regulations.The prediction is empirically tested examining the export survival of different agri-food products from firms operating in Ghana, Mali, Malawi, Senegal and Tanzania. The results suggest that agri-food products that require more financing to keep up with food safety regulation of the destination market, indeed sustain longer in foreign market, when they are exported from countries with better developed financial markets.Chapter 3 analyzes the link between financial markets and efficiency of resource allocation in an economy. Producing and exporting products inconsistent with a country's factor endowments constitutes a serious misallocation of funds, which undermines competitiveness of the economy and inhibits its long term growth. In this chapter, inefficient exporting patterns are analyzed through the lens of the agency theories from the corporate finance literature. Managers may pursue projects with negative net present values because their perquisites or even their job might depend on them. Exporting activities are particularly prone to this problem. Business related to foreign markets involves both high levels of additional spending and strong incentives for managers to overinvest. Rational managers might have incentives to push for exports that use country's scarce factors which is suboptimal from a social point of view. Export subsidies might further skew the incentives towards inefficient exporting. Management can divert the export subsidies into investments promoting inefficient exporting.Corporate finance literature stresses the disciplining role of outside debt in counteracting the internal pressures to divert such "free cash flow" into unprofitable investments. Managers can lose both their reputation and the control of "their" firm if the unpaid external debt triggers a bankruptcy procedure. The threat of possible failure to satisfy debt service payments pushes the managers toward an efficient use of available resources (Jensen, 1986; Stulz, 1990; Hart and Moore, 1995). The main sources of debt financing in the most countries are banks. The disciplining role of banks might be especially important in the countries suffering from insufficient judicial quality. Banks, in pursuing their rights, rely on comparatively simple legal interventions that can be implemented even by mediocre courts. In addition to their disciplining role, banks can promote efficient exporting patterns in a more direct way by relaxing credit constraints of producers, through screening, identifying and investing in the most profitable investment projects. Therefore, a well-developed domestic financial system, and particular banking system, would help to push a country's exports towards products congruent with its comparative advantage.This prediction is tested looking at the survival of different product categories exported to US market. Products are identified according to the Euclidian distance between their revealed factor intensity and the country's factor endowments. The results suggest that products suffering from a comparative disadvantage (labour-intensive products from capital-abundant countries) survive less on the competitive US market. This pattern is stronger if the exporting country has a well-developed banking system. Thus, a strong banking sector promotes exports consistent with a country comparative advantage.Chapter 4 of my PhD thesis further examines the role of financial markets in fostering efficient resource allocation in an economy. In particular, the allocative efficiency hypothesis is investigated in the context of equity market liberalization.Many empirical studies document a positive and significant effect of financial liberalization on growth (Levchenko et al. 2009; Quinn and Toyoda 2009; Bekaert et al., 2005). However, the decrease in the cost of capital and the associated growth in investment appears rather modest in comparison to the large GDP growth effect (Bekaert and Harvey, 2005; Henry, 2000, 2003). Therefore, financial liberalization may have a positive impact on growth through its effect on the allocation of funds across firms and sectors.Free access to international capital markets allows the largest and most profitable domestic firms to borrow funds in foreign markets (Rajan and Zingales, 2003). As domestic banks loose some of their best clients, they reoptimize their lending practices seeking new clients among small and younger industrial firms. These firms are likely to be more risky than large and established companies. Screening of customers becomes prevalent as the return to screening rises. Banks, ceteris paribus, tend to focus on firms operating in comparative-advantage sectors because they are better risks. Firms in comparative-disadvantage sectors finding it harder to finance their entry into or survival in export markets either exit or refrain from entering export markets. On aggregate, one should therefore expect to see less entry, more exit, and shorter survival on export markets in those sectors after financial liberalization.The paper investigates the effect of financial liberalization on a country's export pattern by comparing the dynamics of entry and exit of different products in a country export portfolio before and after financial liberalization.The results suggest that products that lie far from the country's comparative advantage set tend to disappear relatively faster from the country's export portfolio following the liberalization of financial markets. In other words, financial liberalization tends to rebalance the composition of a country's export portfolio towards the products that intensively use the economy's abundant factors.

Portfolio delegation under short-selling constraints

In this paper we study delegated portfolio management when themanager's ability to short-sell is restricted. Contrary to previousresults, we show that under moral hazard, linear performance-adjustedcontracts do provide portfolio managers with incentives to gatherinformation. The risk-averse manager's optimal effort is an increasingfunction of her share in the portfolio's return. This result affectsthe risk-averse investor's optimal contract decision. The first best,purely risk-sharing contract is proved to be suboptimal. Usingnumerical methods we show that the manager's share in the portfolioreturn is higher than the rst best share. Additionally, this deviationis shown to be: (i) increasing in the manager's risk aversion and (ii)larger for tighter short-selling restrictions. When the constraint isrelaxed the optimal contract converges towards the first best risksharing contract.

Consumer Advisory Bulletin, "Should I Buy the Service Contract?", January 2008

The Attorney General’s Consumer Protection Division receives hundreds of calls and consumer complaints every year. Follow these tips to avoid unexpected expense and disappointments. This record is about: "Should I Buy the Service Contract?"

Globalization and the provision of incentives inside the firm: The effect of foreign competition

This paper studies the effect of changes in foreign competition on the structureof compensation and incentives of U.S. executives. We measure foreign competitionas import penetration and use tariffs and exchange rates as instrumental variables toestimate its causal effect on pay. We find that higher foreign competition leads tomore incentive provision in a variety of ways. First, it increases the sensitivity of payto performance. Second, it increases whithin-firm pay differentials between executivelevels, with CEOs typically experiencing the largest wage increases, partly becausethey receive the steepest incentive contracts. Finally, higher foreign competition is alsoassociated with a higher demand for talent. These results indicate that increased foreigncompetition can explain some of the recent trends in compensation structures.

Tax incentives and the city

It is difficult to justify tax incentives within the existing economicsliterature on tax competition. We develop a model in which communitiesare interested in attracting firms not only for their own capital butalso for the concentration externalities, a form of agglomerationeconomies, their location bestows on existing firms. We find that itis efficient in this case for communities to offer tax incentives,defined as a tax rate below the benefit tax level, to firms. We presentthe recent relocation of the Boeing Corporation's headquarters fromSeattle to Chicago as a case study.