Dual and common agency issues in international joint ventures: Evidence from China

With the help of a theoretical model we analyze the relation between equity sharing in an international joint venture (EJV) and local public goods provision in a setting where the local government faces a commitment problem to provide public services ex post to the set-up of the firm. We show that to overcome such a dual agency problem, the multinational leaves more local rents to the local partner than in the first-best, so as to provide stronger incentives for the government to supply public goods. Applying dynamic panel data estimation, we test the trade-off between local public goods and ownership shares across 31 Chinese provinces to find support for our mechanismEquity sharing, foreign investment, local public goods, China

Social Exchange and Common Agency in Organizations

We study the relation between formal incentives and social exchange in organizations where employees work for several managers and reciprocate a manager’s attention with higher effort. To this end we develop a common agency model with two-sided moral hazard. We show that when effort is contractible but attention is not, the first-best can be achieved through granting autonomy of effort choice to employees and giving bonus pay to both managers and employees. When neither effort nor attention are contractible, an ‘attention race’ arises, as each manager tries to sway the employee’s effort his way. While this may result in too much social exchange, the attention race may also be a blessing because it alleviates managers’ moral-hazard problem in attention provision. Lastly, we derive the implications of these contract imperfections for optimal organizational design.social exchange, reciprocity, incentive contracts, common agency, organizational design

Regional determinants of FDI in China: A new approach with recent data

We empirically investigate the factors that drive the uneven regional distribution of foreign direct investment (FDI) inflows to China.s 31 provinces from 1995 to 2006. The aim of this paper is to explain the investment patterns in (partly) foreign funded firms across these provinces. We use factor analysis and derive four factors that may drive FDI: institutions, labor costs, market potential, and geography. The factor analysis then structures our dataset to concentrate on these four clusters consisting of 42 province specific and time-varying items. Factor analysis not only helps us to identify the latent dimensions which are not apparent from direct study, but also facilitates econometrics with reduced number of variables. We apply fixed effects panel estimation and GMM to account for endogeneity. In line with theoretical predictions we find that foreign investors choose and invest more in provinces with better institutions, lower labor costs, and larger market size. Nonlinear results denote that the positive effects of infrastructure and market potential on FDI are complementary to each other, which is in line with the economic geography literature. In particular the effect of market size on FDI is larger in provinces with better institutions. Sub-sample study confirms the existences of a large disparity between East and West. In the poorer large western provinces FDI is strongly driven by the geographical factor in contrast to the east of China where institutions play a significant role to build the .factory of the world.. Robustness tests indicate that two sub-dimensions of institutions, namely infrastructure and governance, are important to determine the location choice of FDI in China.FDI, China, factors analysis, regional and spatial distribution of FDI, location choice

Reciprocity and Incentive Pay in the Workplace

We study optimal incentive contracts for workers who are reciprocal to management attention. When neither worker's effort nor manager's attention can be contracted, a double moral-hazard problem arises, implying that reciprocal workers should be given weak financial incentives. In a multiple-agent setting, this problem can be resolved using promotion incentives. We test these predictions using German Socio-Economic Panel data. We find that workers who are more reciprocal are significantly more likely to receive promotion incentives, while there is no such relation for individual bonus pay.Reciprocity, social exchange, incentive contracts, double moral hazard, GSOEP

Civil Conflict, Federalism and Strategic Delegation of Leadership

This article analyses negative externalities that policy makers in one region or group may impose upon the citizens of neighbouring regions or groups. These externalities may be material, but they may also be psychological (in the form of envy). The latter form of externality may arise from the production of "conspicuous" public goods. As a result, decentralized provision of conspicuous public goods may be too high. Potentially, a centralized legislature may internalize negative externalities. However, in a model with strategic delegation we argue that the median voter in each jurisdiction may anticipate a reduction in local public goods supply and delegates to a policymaker who cares more for public goods than she does herself. This last effect mitigates the expected benefits of policy centralization. The authors' theory is then applied to the setting of civil conflict, where they discuss electoral outcomes in Northern Ireland and Yugoslavia before and after significant institutional changes which affected the degree of centralization. These case studies provide support for the authors' theoretical predictions.conflict; federalism; strategic delegation

Social Exchange and Common Agency in Organizations

We study the relation between formal incentives and social exchange in organizations where employees work for several managers and reciprocate to a manager's attention with higher effort. To this end we develop a common agency model with two-sided moral hazard. We show that when effort is contractible and attention is not, the first-best can be achieved through bonus pay for both managers and employees. When neither effort nor attention are contractible, an 'attention race' arises, as each manager tries to sway the employee's effort his way. While this may result in too much social exchange, the attention race may also be a blessing because it alleviates managers' moral-hazard problem in attention provision. Lastly, we derive the implications of these contract imperfections for optimal organizational design

Decomposing International Trade in Commercial Services

To delve deeper into the rise of trade in commercial services as the most important determinant of the recent increase in digital trade, this article offers a decomposition of international service trade using the latest release of the Inter-Country Input-Output (ICIO) tables. The analysis decomposes international service trade into a split between (a) direct services exports and services embodied in goods, (b) advanced economies and the major emerging markets, and (c) the major commercial services industries. We show that overall direct service exports have become more important relative to services embodied in goods, especially in advanced economies (the 'cross-border' effect). Further, we show that for emerging markets, the rise of the exports of services comes from the increase in volume of export of goods, which embed services and not because of an increased share of services embodied in the domestic value of exported goods (the 'embodied volume' effect). Finally, we show that the increase in services trade can be attributed to the increase in traded information technology (IT) services and not so much to that in financial and business services that are increasingly traded digitally across borders (the 'plain vanilla digitalisation' effect)

Why does Centralisation fail to internalise Policy Externalities?

Centralisation of political decision making often fails to produce the desired results. For instance, it is frequently argued that decision making within the European Union results in overspending and overregulation in some policy areas, while too low spending and too little regulation prevails in other policy areas. In this paper, we study a model in which delegates from jurisdictions bargain over the amounts of public goods provided by jurisdictions. Following Besley and Coate (2000) we show that local policy makers have an incentive to delegate bargaining to 'public good lovers' if all the cost of public goods are shared through a common budget. Consequently, overprovision of public goods results. If a sufficiently large part of the cost of public goods can not be shared among regions, underprovision of public goods persists under centralised decision making because local policy makers delegate bargaining to 'conservatives'. Underprovision is strongest when spillover effects are moderate: both in the absence of spillover effects and in the case of global public goods, centralised decision making produces the social optimum. Finally, we study financing rules that may help to avoid strategic delegation by local policy makers

Reciprocity and Incentive Pay in the Workplace

We study optimal incentive contracts for workers who are reciprocal to management attention. When neither worker's effort nor manager's attention can be contracted, a double moral-hazard problem arises, implying that reciprocal workers should be given weak financial incentives. In a multiple-agent setting, this problem can be resolved using promotion incentives. We test these predictions using German Socio-Economic Panel data. We find that workers who are more reciprocal are significantly more likely to receive promotion incentives, while there is no such relation for individual bonus pay