Contestable Licensing

We analyze a model of (repeated) franchise bidding for natural monopoly that relies on contestable licensing -- the right to operate the franchise belongs to the party who owns the appropriate license as long as the license is not successfully contested through a process of competitive bidding -- and demonstrate the usefulness of contestable licensing in inducing high quality performance from incumbent franchisees. In a world where quality is observable but not verifiable, the simple regulatory scheme we describe combines market-like incentives with regulatory oversight to generate efficient outcomes. Our analysis builds on the "Chicago approach" to regulating a natural monopoly (Demsetz (1968), Stigler (1968), and Posner (1972)). We consider a natural monopoly franchise. Every period, the incumbent monopolist (franchisee) may either provide high quality service which yields a "normal" rent, or low quality service, which results in a correspondingly higher per-period payoff for the monopolist, but lower overall welfare. The quality of service is observable by the relevant regulatory agency, but it is not verifiable in court. Because of this non-verifiability, the political economy environment in which the regulator operates makes it difficult for the regulator to credibly commit to transfer the franchise to another firm upon observation of low quality. The scheme we describe facilitates such commitment, and provides the appropriate "checks and balances" to ensure that it is not abused by an opportunistic regulator. The analysis gives rise to a number of interesting conclusions. Perhaps the most important of which is that the formal separation in the model between the issue of the quality of service on the one hand, and the price and cost of operation on the other hand, allows us to describe a regulatory scheme that permits the combination of assuring high quality service together with the provision of "high-powered" incentives for cost reduction.

Strategic ambiguity in electoral competition

Many have observed that political candidates running for election are often purposefully expressing themselves in vague and ambiguous terms. In this paper we provide a simple formal model of this phenomenon. We model the electoral competition between two candidates as a two--stage game. In the first stage of the game two candidates simultaneously choose their ideologies, and in the second stage they simultaneously choose their level of ambiguity. Our results show that ambiguity, although disliked by voters, may be sustained in equilibrium. The introduction of ambiguity as a strategic choice variable for the candidates can also serve to explain why candidates with the same electoral objectives end up ``separating'', that is, assuming different ideological positions.Ambiguous platforms, ideological differentiation

Investor Protection and Interest Group Politics

We model how lobbying by interest groups affects the level of investor protection. In our model, insiders in existing public companies, institutional investors (financial intermediaries), and entrepreneurs who plan to take companies public in the future, compete for influence over the politicians setting the level of investor protection. We identify conditions under which this lobbying game has an inefficiently low equilibrium level of investor protection. Factors that operate to reduce investor protection below its efficient level include the ability of corporate insiders to use the corporate assets they control to influence politicians, as well as the inability of institutional investors to capture the full value that efficient investor protection would produce for outside investors. The interest that entrepreneurs (and existing public firms) have in raising equity capital in the future reduces but does not eliminate the distortions arising from insiders' interest in extracting rents from the capital public firms already have. Our analysis generates testable predictions, and can explain existing empirical evidence, regarding the way in which investor protection varies over time and around the world.

Credits, Crises, and Capital Controls: A Microeconomic Analysis

We analyze the behavior of foreign banks who sequentially provide credit to finance projects in an emerging market. The foreign banks are exposed to both micro-economic risks and the macro-economic risk of a currency crisis, and there are no bailout guarantees. Nevertheless, we show that it is often the case that banks provide too much credit too easily and that this behavior may precipitate the onset of a currency crisis. We demonstrate how the imposition of capital controls in the form of taxes and subsidies on foreign investment may improve the situation. Whereas most of the literature explains currency crises as the consequence of causes that lie within the debtor countries, the general message of our paper may be interpreted as placing part of the blame on the international financial community as well.

Contestable Licensing

We analyze a model of repeated franchise bidding for natural monopoly with contestable licensing - a franchisee halds an (exclusive) license to operate a franchise until another rm offers to pay more for it. In a world where quality is observable but not veri able, the simple regulatory scheme we describe combines market-like incentives with regulatory oversight to generate efficient outcomes.

CORRUPTION AND OPENNESS

We consider a neoclassical growth model with endogenous corruption. Corruption and wealth, which are co-determined in equilibrium, are shown to be negatively correlated. Richer countries tend to be less corrupt, and corrupt economies tend to be poorer. This observation gives rise to the following puzzle: If poorer countries do indeed experience higher levels of corruption, and if indeed as suggested by a number of empirical studies corruption hampers growth, then how did rich countries, who were poor once, become rich? Our answer is simple. In the past, economies were mostly "closed" in the sense that it was difficult to transfer illicit money outside of the economy. In contrast, today's economies are mostly open. In the relatively closed economies of the 19th century, the gains from corruption remained inside the country and became part of the economy's productive capital. In contrast, in today's open economies, corrupt agents smuggle stolen money abroad depleting their country's stock of capital. We confirm this intuitive explanation by testing the hypothesis that the effect of corruption on wealth depends on the economy's degree of openness using cross-country data.Corruption, Growth, Openness, International Development, F2, H0, O1, O4,

Rise to the Challenge or Not Give a Damn: Differential Performance in High vs. Low Stakes Tests

This paper studies how different demographic groups respond to incentives by comparing performance in the GRE examination in "high" and "low" stakes situations. The high stakes situation is the real GRE examination and the low stakes situation is a voluntary experimental section of the GRE that examinees were invited to take immediately after they finished the real GRE exam. We show that males exhibit a larger difference in performance between the high and low stakes examinations than females, and that Whites exhibit a larger difference in performance between the high and low stakes examinations relative to Asians, Blacks, and Hispanics. We find that the larger differential performance between high and low stakes tests among men and whites can be partially explained by the lower level of effort invested by these groups in the low stake test.gender, competition, incentives, GRE, high stakes, low stakes, test score gap

Corruption and Openness

We report an intriguing empirical observation. The relationship between corruption and output depends on the economy's degree of openness: in open economies, corruption and GNP per capita are strongly negatively correlated, but in closed economies there is no relationship at all. This stylized fact is robust to a variety of different empirical specifications. In particular, the same basic pattern persists if we use alternative measures of openness, if we focus on different time periods, if we restrict the sample to nclude only highly corrupt countries, if we restrict attention to specific geographic areas or to poor countries, and if we allow for the possible endogeneity of the corruption measure. We find that the extent to which corruption affects output is determined primarily by the degree of financial openness. The difference between closed and open economies is mainly due to the different effect of corruption on capital accumulation. We present a model, consistent with these findings, in which the main channel through which corruption affects output is capital drain.corruption openness growth

Private Selection and Arbitration Neutrality

This paper examines the effects that the private selection of arbitrators have over arbitrators' incentives in deciding the cases before them over the arbitrators' implied bias. These effects have important implications for the design of Arbitration rules by Arbitration and Dispute Resolution providers as well as by other organizations that rely on arbitration for the resolution of disputes among their members. We show that private selection of arbitrators might adversely affect the accuracy of arbitrators' decisions because arbitrators might want to make an incorrect decision when a correct decision would carry the inference that they are biased. We compare the accuracy of arbitrators' decisions under different arbitrator selection procedures