Entrepreneurship and Institutions

In this paper entrepreneurs are defined as agents who bring about economic change by combining their own effort with other factors of production in search of economic rents. The institutional setup is argued to determine both the supply and direction of entrepreneurial activity. Four key institutions are explored more closely: property rights protection, savings policies, taxation and the regulation of labor markets. Institutions have far-reaching effects on entrepreneurship, and they largely determine whether or not entrepreneurial activity will be socially productive. Due to the responsiveness of entrepreneurship to the institutional setup it is maintained that in-depth analyses of specific institutions are required in order to further our understanding of the determinants of entrepreneurial behavior and the economic effects of entrepreneurship. The paper also demonstrates that it is problematic to use self-employment as an empirical proxy for productive entrepreneurship

Productive and Destructive Entrepreneurship in a Political Economy Framework

Recent research has highlighted the role of institutions in channeling entrepreneurs into activities with positive or negative effects on overall productivity. Embedding central elements from these theories into a political economy framework reveals the bilateral causal relation between entrepreneurs and institutions. Core features of the entrepreneur force us to view its effects on institutions as more than mechanic general equilibrium adjustments. Three analytically separate channels of influence are isolated, analyzed and exemplified. Entrepreneurs influence formal economic institutions through direct involvement in politics, by using their entrepreneurial talent to wield de facto political power and by altering the effect of formal institutions. We propose a parsimonious framework that incorporates these effects as well as the role of institutions in channeling entrepreneurial talent. We use examples from modern history as a real-world context to illustrate our framework

Risk Arbitrage in Takeovers

The paper studies the role of risk arbitrage in takeover contests. We show that arbitrageurs have an incentive to accumulate non-trivial stakes in a company target of a takeover. For each arbitrageur, the knowledge of his own presence (and that he will tender a positive fraction of his shares) is an informational advantage which guarantees that there is a scope for trade with the other shareholders. In equilibrium, the number of arbitrageurs buying shares and the number of shares they buy are determined endogenously. The paper also presents a range of empirical implications, including the relationship between trading volume, takeover premium, bidder's toehold, liquidity of the shares and the probability that the takeover will succeed.Arbitrage; Corporate Control; Mergers

Large Shareholders, Private Benefits of Control and Optimal Schemes for Privatization

We analyze optimal schemes for privatization in a transitional economy. In many cases, established Western firms are good candidates for large shareholders of a local firm, since the sale of the shares can generate large amount of revenues and furthermore, in the future, the home country can free-ride on the efficiency improvement of the firm. However, not all Western firms are good owners. Some of them are more interested in the private benefit of control than the potential of efficiency improvement. Such Western firms are bad owners in the long run, although they may well be willing to pay a high price to obtain the control right. Assuming that the government cares about a convex combination of sales revenue and the future value of the firm, we show that the optimal scheme is dependent upon the magnitude of the control benefit. Moreover, we show that the number of shares sold is a crucial instrument to attract the most efficient company.East European Privatization; Optimal Auction; Private Benefits of Control

Ex Ante Effects of Ex Post Managerial Ownership

This paper highlights the trade-off between the need to restructure a company and the need to provide managers with appropriate incentives to run it after the restructuring. In order to provide incentives, it is optimal to let managers acquire equity in the firm. However, the expectations to be able to buy shares in the future may create ex-ante incentives to delay restructuring. This effect is particularly important for events where managers can acquire a substantial number of shares, such as privatizations or MBOs. In equilibrium, the shares are not underpriced, but the delay in restructuring which took place in the period before reduces the value of the company. We report empirical evidence on MBOs and privatizations consistent with the model in this paper.management buy-outs; managers incentives; privatizations

Government Distributional Concerns and Economic Policy During the Transition from Socialism

Before the transition governments had strong distributional objectives, which they pursued mainly by direct controls over state enterprise wage rates and hiring decisions, yielding a highly compressed wage distribution. During the reform they maintained similar controls over state enterprises, but had to take into account competition from the new non-state sector that was mostly free from these controls. Based on these distributional considerations alone, we forecast: 1) an immediate and continuing decline in the skills of workers in the state sector as the most able workers leave; 2) higher productivity in the non-state sector, which consists of the most able workers; 3) accounting losses in the state sector, reflecting the transfer of tax revenue to finance payments to the unskilled previously financed within the firm; and 4) restructuring within the state sector to reduce the distortions to relative wage rates. These phenomena are broadly observed across all transition economies.Economic Transition; Government In Transition; labour productivity in transition; policy during transition; Redistribution; Wage Structure