Friday, April 29, 2011

Barry R. Weingast and William J. Marshall. 1988. The Industrial Organization of Congress; or, Why Legislatures, Like Firms, Are Not Organized as Markets

Barry R. Weingast and William J. Marshall, "The Industrial Organization of Congress; or, Why Legislatures, Like Firms, Are Not Organized as Markets," Journal of Political Economy 96, 1 (Feb. 1988): 132-63.

The purpose of this paper is to extend the theory of the firm to the study of political organizations and to explain the pattern of institutions within the legislatures that facilitates decision making.

I. Introduction
  • The diversity of interests within the legislature creates gains from exchange.
  • Legislative institutions are like market institutions because they reflect:
    1. the goals and preferences of individuals (legislators seeking reelection)
    2. transaction costs that are induced by imperfect information. 
II. The New Economics of Organization
  • Firms emerge to avoid the costs of using markets and the price system; their set of contractual mechanisms substitute for the price mechanism.
  • The literature on vertical integration argues that organizational form is largely an endogenous response to ex post contractual problems and ex post opportunism that arise when ex post incentives of the bargaining parties are inconsistent with performing ex ante agreements.
III. Representatives and Their Constituencies
  • Perspectives in this paper, that legislative institutions can be analyzed as market institutions/firms, rest on the following assumptions:
    1. Congressmen represent the (politically responsive) interests located within their district. Electoral competition induces congressmen, at least in part, to represent the interests of their constituents. Because groups are not uniformly distributed across constituencies, different legislators represent different groups.
    2. Parties place no constraints on the behavior of individual representatives.
    3. Majority rule is a binding constraint.
IV. The Gains from Exchange: The Problem to Be Solved
  • Given the diversity of interests legislators represent, each can bargain and cooperate (vote trade, logroll, etc.) with other legislators in order to benefit their respective constituents.
  • The new economics of organization suggests that institutions evolve to enforce cooperation.
  • Previous work viewed logrolling/vote trading as a market in votes in which legislators give away votes on issues that have lower marginal impact on their district (and therefore on their electoral fortunes) in exchange for votes on issues having a larger marginal impact. 
    • Shortcomings: assumes there are no random or unforeseen future events that may influence outcomes or payoffs. Either the time dimension is suppressed or enforcement of agreements over time is left exogenous. Does not explain how legislators cope with agreements that cover more than one legislative session.
  • Uncertainty over the future status of today's bargain come from:
    1. Noncontemporaneous benefit flows - occurs when benefit flows to one party can be curtailed when the other party reneges on the agreement after they have already received their benefits.
    2. Nonsimultaneous exchange - occurs when bills do not come up for a vote simultaneously. Bills evolve and public opinion can change. 
  • Legislative institutions reduce the circumstances in which breakdown occurs; it is not a substitute for reputation building and trigger strategies commonly used in repeat play, but rather complement those strategies for circumstances in which those strategies fail.
  • In the model in this paper, instead of trading votes, legislators exchange special rights affording the holder of these rights additional influence over well-defined policy jurisdictions. The extra influence over particular policies institutionalizes a specific pattern of trades and because the exchange is institutionalized, it need not be renegotiated each new legislative session and it is subject to fewer enforcement problems.
V. The Legislative Committee System
  • Committees are decentralized decision-making units compose of those legislators with the greatest stake in their jurisdiction.
  • The legislative committee system is defined by the following three conditions:
    1. Committees are composed of a number of seats or positions, each held by an individual legislator. 
      • Associated with each committee is a specific subset of policy issues over which it has jurisdiction; within their jurisdiction, committees possess the monopoly right to bring alternatives to the status quo up for a vote before the legislature.
      • Committee proposals must command a majority of votes against the status quo to become policy.
    2. There exists a property rights system over committee seats called the "seniority system." 
      • A committee member holds his position as long as he chooses to remain on the committee; subject to his reelection, he cannot be forced to give it up.
      • Leadership positions within the committee are allocated by seniority, the length of continuous service on the committee.
      • Rights to committee positions cannot be sold or traded to others. 
    3. Whenever a member leaves a committee, his seat becomes vacant and is filled using a bidding mechanism amongst the congressmen.
  • Assertions about committee operation:
    1. The assignment process operates as a self-selection mechanism.
    2. Committees are not representative of the entire legislature but instead are composed of "preference outliers," or those who value the position highly.
    3. Committee members receive the disproportionate share of the benefits from programs within their jurisdiction.
  • Committee jurisdiction resolves noncontemporaneous benefit flows; a party cannot renege on an agreement to support a bill in another party's jurisdiction by later passing a new bill to revoke that original bill because the reneging party will not have the jurisdiction to bring that bill to a vote. 
  • The legislative committee system effects on coalition formation:
    1. Agenda power held by committee members implies that successful coalitions must include the members of the relevant committee or else the bill will not reach the floor for a vote; the committee veto reduces the feasible set of policies.
    2. Trades among committee members are more likely to succeed that those across committees; inter-committee agreements have to bring separate bills to be voted on while intra-committee agreements can present a single bill that satisfies trading partners simultaneously once it is passed.
    3. Policy will respond only to large changes in political circumstances or to major shifts in the electorate because forming new coalitions is difficult. 
  • The majority rule condition precludes any one committee from extracting too many gains at the expense of others. 
    • Policy in a particular area can remain stable if committee membership is relatively stable.
VI. Conclusion
  • Legislative institutions enforce bargains among legislators.
  • Given the peculiar form of bargaining problems found in legislatures, specific forms of nonmarket exchange are superior to market exchange.
  • Empirical evidence supports four implications that follow from this model of legislative institutions but do no follow from a simple market exchange mechanism.
    1. Committees are composed of "high demanders," that is, individuals with greater than average interest in the committee's policy jurisdiction.
    2. The committee assignment mechanism operates as a bidding mechanism that assigns individuals to those committees they value most highly.
    3. Committee members gain a disproportionate share of the benefits from their policy area. 
    4. As the interests represented on tghe committee change, so too will policy, with the interests of non-committee members held constant. 

Monday, April 25, 2011

Michael Spence. 1973. Job Market Signaling

Michael Spence. 1973. "Job Market Signaling," The Quarterly Journal of Economics Vol. 87 #3 (August): 355-374.

  1. Indices - observable, unalterable attributes, such as race. Changes to such attributes are do not occur at the discretion of the individual.
  2. Signals - observable characteristics attached to an individual that are subject to manipulation, such as education.
  3. Signaling costs - the cost of manipulating a signal.

I. Hiring as Investment Uncertainty
  • Hiring is an investment decision because it takes time to learn an individual's productive capabilities after they are hired.
  • Hiring is a decision made under uncertainty because an individual's productive capabilities are not known beforehand.
II. Applicant Signaling
  • Potential employees confront an offered wage schedule that are a function of signals and indices.
  • Critical assumption: signaling will not effectively distinguish one applicant from another unless the signaling costs are negatively correlated with productive capability.
    • If this condition does not hold, everyone will invest in the signal in exactly the same way and become undifferentiable.
    • An alterable characteristic becomes an actual signal if the signaling costs aer negatively correlated with the individual's unknown productivity; this is a necessary but not sufficient condition.
III. Information Feedback and the Definition of Equilibrium
  • New market information comes in to the employer through hiring and subsequent observation of productive capabilities as they relate to signals.
  • An equilibrium occurs when the set of employer beliefs about signals and indices prior to hiring generate offered wage schedules, applicant signaling decisions, hiring, and new market data over time that are consistent with those intial beliefs; beliefs before and after hiring and observing are equivalent.
IV. The Informational Impact of Indices
  • By themselves, indices could never tell the employer anything about productivity.
    • Any informational impact of indices must be through their interaction with the educational signaling mechanism.
  • There are externalities implicit in the fact that an individual is treated as the average member of the group of people who look the same and that, as a result, and in spite of an apparent sameness the opportunity sets facing two or more groups that are visibly distinguishable may in fact be different.
  • The source of signaling and wage differentials is in the informational structure of the market itself. Differential signaling costs over groups are an important possibility. 
V. Conclusion
  • The framework in this paper examines a basic equilibrium signaling model and one possible type of interaction of signals and indices. This framework can be used to examine phenomena ranging from selective admissions procedures, promotion, and loans and consumer credit.

Sunday, April 17, 2011

Joe B. Stevens. 1993. The Economics of Collective Choice.

Joe B. Stevens. The Economics of Collective Choice. Boulder: Westview Press, 1993. Chapter 5.

This chapter considers whether there can be voluntary solutions to market failure without resorting to coercion by the government. For voluntary action to be effective, it would have to lead to a more efficient level of output or to the right people sharing more fully in the rewards.

  1. Willingness-to-pay (WTP) = what an individual would pay to gain access to new opportunities
  2. Willingness-to-accept (WTA) = what an individual would accept as payment to be deprived of something; the consumer surplus is the minimum payment that would be required to compensate a consumer for reduced availability of a nonmarket good.
    • Discrepancies between the WTP and WTA are due to fundamental differences in how people view potential gains and how they view potential losses. (Prospect Theory)
  3. Marginal congestion costs - for an impure public good, the disadvantages of increased crowding associated with more people in a club. (For example, in a club that provides fire-fighting services, too many members increases the chances that the fire-fighting forces are occupied, helping another member, when your house catches on fire.)
  4. Efficient club size - the level of membership that would equate the (falling) marginal reduction in service cost with the (rising) marginal congestion costs.

  • There might be conflict between self-interest and the collective interest, such as in the case of the Prisoner's Dilemma, in which self-interested actions lead to a collectively worse outcome.
  • The following help to allow for voluntary provision of goods:
    • Researchers argue that feedback, learning, and game replay allow for the possibility of cooperation.
    • It is possible for two individuals to work together to Pareto-efficiently provide a public good by paying prices equivalent to their respective marginal benefit of the public good, but free-riding would still be an issue.
    • Externalities can be eliminated with property rights.
    • People might not free-ride or might help to provide a public good for altruistic reasons.
    • People may choose not to free ride because of the low cost of participation, because of the potentially high cost of nonparticipation (species extinction, for example), and because individual action may be crucial in affecting outcomes. 
  • Hindrances to the voluntary provision of public goods:
    • If transaction costs exist, there would be less incentive for two parties to agree on a Pareto-efficient quantity of the public good. If costs are high enough, they can prevent negotiated solutions altogether.
    • Even with the allocation of property rights, the costs (transaction, monitoring, etc.) of a voluntary solution using property rights with unorganized and dissimilar groups are often so high that they siphon off the willingness to pay for the externality.
  • Conditions for club provisions of goods:
    1. "Provision" condition - labor and capital resources would need to be provided until the summed marginal benefits to members from reducing the congestion costs are equal to the marginal cost of provision.
    2. "Toll" or "utilization" condition - an efficient toll should equate a member's marginal benefit from use with the marginal congestion costs that might be imposed on others. 
    3. "Membership" condition - new members should be added until the net benefits from membership (through cost reductions to others) equal the congestion costs imposed on others by that member's use of services. If members have different preferences and incomes, there are likely to be differences in the amount and value of property to be protected. 

Richard Price. 1998. Reversing the Gun Sights: Transnational Civil Society Targets Land Mines

Richard Price. 1998. "Reversing the Gun Sights: Transnational Civil Society Targets Land Mines." International Organization 52(3): 613-44. 

Price examines the hard case of the role of transnational nonstate actors working through issue networks to affect how states prepare for and wage war in order to demonstrate the influence of international politics on state practices of weapons procurement and military doctrine. He seeks to investigate the processes by which members of a transnational civil society seek to change the security policies of states by generating international norms that shape and redefine state interests. 
  • Terms:
    1. Civil society - the locale self-consciously identified by both the NGO (nongovernmental organization) community and by governments.
    2. Transnational - interactions across national boundaries where at least one actor is a nonstate agent.
    3. Transnational civil society - a set of interaction among an imagined community to shape collective life that are not confined to the territorial and institutional spaces of states. 
I. Introduction
  • In the 1990s, AP land mines became the object of a transnational campaign because they:
    1. hurt primarily populations without adequate emergency care
    2. rendered large tracts of land useless
    3. burdened economies with disabled survivors
  • The effort culminated in the signing of a comprehensive ban treaty by 122 states in December 1997.
II. Issue Generation and Moral Persuasion
  • Members of civil society were the primary movers in generating world wide concern about AP land mines when no international legal institutions existed to deal with the issue.
  • Civil society's most basic effect was the transnational dissemination of information about the scope of land mine use and its affects to transnational actors.
  • Transnational actors then politicized the issue and taught states that land mines were a problem by focusing on the victims and generating and publicly disseminating information to governments and wider society alike; the impetus for action came from outside the state.
  • Early steps such as a U.S. export moratorium on AP land mines were used by members of the campaign to challenge others to take leadership measures.
  • The International Committee of the Red Cross (ICRC) launched an international media campaign in November 1995 directed at a worldwide ban on the production, stockpiling, transfer, and use of all AP land mines in contrast to its usual reputation/role as a neutral humanitarian organization. 
  • The International Campaign to Ban Landmines (ICBL) provided support for national campaigns worldwide; as a direct result of their activities the issue received widespread coverage in the media, even in comic books. 
III. Networks
  • Civil society sought to achieve its aims by network with political officials in governments and international organizations. 
  • NGOs were allowed to participate in policy debates and interstate negotiations with state officials; they made statements, provided information, and the like.
  • An important effect of networking in an issue campaign is that it generates access to the policymaking process by transforming decisions about weapons doctrine from an insulated military matter into a political decision. 
  • The global web of electronic media, including telecommunications, fax machines, the Internet and World Wide Web played an unprecedented role in facilitating a global network of concerned supporters around the issue. Telecommunications and hyperlinked networks on the Internet are important in the following respects:
    1. They provide a web of surveillance that has not only facilitated widespread awareness of the sources of the problem
    2. They greatly facilitate the watchdog role of civil society in grading state and industry compliance with the AP land mine taboo.
    3. They create a "space" for politics occupied by a transnational political community--a space other than that bounded by the territory of the state--and, thus, undermine the idea that the international states system is the legitimate arena where politics across borders takes place. 
IV. Grafting
  • War and international humanitarian laws set the background against which efforts to ban weapons such as land mines were made intelligible. Two central concepts from these traditions:
    • Civilian discrimination / noncombatant immunity - one of the oldest notions of the just war doctrine, it meant that civilians are not to be intentional objects of attack during conflict.
    • Unnecessary suffering - the principle that means of warfare that cause superfluous injury are prohibited.
  • The ICRC was instrumental in institutionalizing such humanitarian norms of warfare, which legitimized efforts to restrict warfare among states.
  • AP land mines transgressed the norm of discrimination because they operate without immediate human intentionality and are indiscriminate in the nature of their effects.
  • Proponents of a ban grafted normative justifications from other weapons (chemical and biological weapons) that were already successfully branded taboo onto AP land mines to justify banning land mines.
V. Utility and Reversing the Burden of Proof
  • The ICRC commissioned an analysis of the "Military Use and Effectiveness of Anti-personnel Mines", which found that the use of anti-personnel mines never empirically played a major role in determining the outcome of a conflict; they only had a marginal tactical value under certain specific but demanding conditions.
  • Questioning the military utility of mines helped to instigate a comparable shift by making mine proponents publicly defend, to domestic and international audiences, what previously required no justification: the assumption that mines have military utility and thus pass the test of military necessity.
VI. Authority and Civil Society
  • The transnational campaign challenged and transformed the balance between civil society and the state in the constitution of security. 
  • State acceptance of the Ottawa treaty embodies how the issue has been defined: less like a war issue, where change tends to move at a glacial pace and states are reticent to intervene, and more like a humanitarian or health crisis for which norms have developed that legitimize rapid multilateral action.
VII. Conclusion
  • The role of moral persuasion and the social pressure arising from identity politics and emulation are particularly crucial.
  • Thee impetus for systemic normative change fostered by transnational civil society
  • Two widespread processes were stimulated by civil society:
    1. Norm adoption through moral entrepreneurship
    2. Emulation
  • Widespread acceptance of the validity of the AP land mine taboo is indicative of the emergence of a new norm, a status formalized by states signing and ratifying the land mines treaty. 

Sunday, April 10, 2011

Erik Voeten. 2008. The Impartiality of International Judges: Evidence from the European Court of Human Rights

Erik Voeten. 2008. "The Impartiality of International Judges: Evidence from the European Court of Human Rights." American Political Science Review 102(4): 417-33.

The paper examines international judicial behavior in the context of the European Court of Human Rights (ECtHR) and evaluates the conditions under which judges are more and less likely to display national bias and whether ECtHR judges are more benevolent toward respondent governments that share political or economic relationships with their national governments. 

The primary objective of this article is not to estimate the overall effect of national bias but to examine whether there are systematic differences in the voting of judges that are revealing about potential underlying biases in their decisions and why some judges make different choices than their colleagues.

I. Introduction
  • The ECtHR evaluates complaints by individuals that their government has violated one or more provisions of the 1950 European Convention for the Protection of Human Rights and Fundamental Freedoms or its protocols after those individuals have exhausted domestic legal remedies.
  • They make:
    • rulings on direct actions against member states in the EU
    • preliminary rulings on issues referred to them by a national government's judiciary to interpret EU law
  • Three plausible sources of bias in international judicial behavior:
    1. Legal Culture - judges may systematically assign different meanings to the same legal rules because they have internalized modes of legal reasoning specific to their domestic legal cultures.
    2. Career Incentives and Geopolitics - although ECtHR judges are not formally representatives of their governments, they do have incentives to behave as such (e.g., six-year renewable terms). Judges who feel threatened in their career prospects may be tempted to rule based on the national interests of their home governments. 
    3. Policy Preferences - ECtHR judges may have personal policy preferences that influence how they evaluate cases, in a way similar to that in which political scientists generally presume that U.S. Supreme Court justices are motivated by policy. 
  • Bias from legal culture ==>
    1. Judges who spend a long time away from their home country in the relative isolation of Strasbourg may well internalize the norms of the court, including impartiality, which is a strong norm in most international judicial contexts. So the longer a judge has served on the ECtHR, the more that judge becomes divorced from affinity toward the homeland. (Socialization hypothesis)
  • Bias from career incentives and geopolitics ==>
    1. Since the salary of an ECtHR judge is high in comparison to what legal practitioners earn in many European countries, economic concerns may affect the desire of sitting judges from such countries to get renominated to the Court and create a bias against wealthier countries.
    2. If judges vote for their home governments because they fear that doing otherwise would threaten their reappointment changes, then judges nearing compulsory retirement age should be less likely to show national bias than should other judges.
    3. If governments successfully select and reselect loyal judges, the sample of judges who have served multiple terms should be biased toward those who reliably represent the government's interests. So contrary to the socialization hypothesis, the career perspective suggests that judges who have served on the court longer are more likely to display national bias.
    4. If judges care about how decisions affect their careers, they may be especially likely to display national bias on politically sensitive cases. Article 3 issues (human rights, torture, etc) are more likely to invite dissents by national judges than are judgments on other articles.
    5. Judges show more leniency toward respondent governments that are important economically or politically to their home country.
  • Bias from policy preferences ==>
    1. If judges are motivated by policy, judges who are predisposed toward activism when they evaluate other nations should display these tendencies also in cases involving their home governments. 
III. Data
  • Independent variables
    1. Legal Origin - take from la Porta el al. (1999)
    2. Judicial Independence
      • De jure independence constructed from institutional characteristics of tenure and the judicial appointment process (La Porta el al. 2004).
      • De facto independence as assessed by a survey of 75 country experts (Feld and Voigt 2003). Its effects are estimated in an equation separate from the de jure independence effects because it is only available for 24 (or 19? ambigious, see page 423, top of second column) countries in the sample .
    3. Judicial Restraint - measure of judges' ideal points, estimated from votes not on cases involving the judges' home countries. High scores indicate high levels of self-restraint. This measure is only used to explain votes on home state violations and is available only for those 97 judges who voted on at least 15 controversial votes.
    4. Judicial Identity - professional identities of judges before ascending to the court taken from Bruinsma (2006) supplemented with new codings based on standard curricula vitae submitted to the Council of Europe's Parliamentary Assembly (Cafter 1998) and ECtHR's Annual Survey of Activities. This measure is available for all regularly appointed judges.
    5. The opportunity cost of losing one's position - combination of adjusted measures such as GDP of a country and gross annual salary of a judge on the highest appellate court in a country.
    6. Retire - indicates whether a judge could realistically expect to be subject to re-election at the end of his/her term.
    7. Trade Dependence - measures the proportion of ottal imports and exports of the judge's home state with the respondent state (Gleditsch 2002).
    8. UN Similarity - reflects the similarity in the UN voting records between the judge's national state and the respondent government. This measure is frequently used as a proxy for similar geopolitical interests (e.g., Gartzke 1998)
  • Dependent variable - whether the judge voted in favor of the government
IV. Results
  • The vote choices of non-nationals had a strong and significant effect on the likelihood that judges favor their governments.
    • As the proportion of judges on the panel who find in favor of the government increases, the likelihood of the national judge finding in favor of a violation also increases.
  • If no non-national judge favored the respondent government in a case, then the national judge was 38% less likely to find in favor of her government, holding all over variables at their means and modes. 
  • There is no statistically significant evidence that judges are more likely to favor their government when their vote is pivotal.
  • Judges from countries with less attractive alternative career opportunities are not significantly more likely to favor their governments.
  • Judges were about 35% more likely to vote in favor of their national governments when the alleged violation was one of the 127 Article 3 violations in the data. The results support the notion that judges are subject to increased pressure on controversial cases that directly deal with the security of a country. 
  • There is consistent evidence that judges are motivated by policy considerations. The proxies for judicial preferences have strong and significant effects on observed vote choices. 
V. Conclusion
  • There is no evidence that legal cultural and geopolitics are important sources of bias among ECtHR judges. 
  • There is evidence that EctHR judges are political actors in the sense that they have policy preferences that shape their choices. 
  • National bias matters and appears to be greater on politically sensitive issues.

Saturday, April 9, 2011

Clifford Carrubba, Matthew Gabel, and Charles Hankla. 2008. Judicial Behavior Under Political Constraints: Evidence from the European Court of Justice.

Clifford Carrubba, Matthew Gabel, and Charles Hankla. 2008. "Judicial Behavior Under Political Constraints: Evidence from the European Court of Justice." American Political Science Review 102(4): 435-52.

This paper investigates how two types of political constraints (threats of noncompliance and legislative override) influence decisions by the European Court of Justice (ECJ).

I. Background
  • The ECJ has established two doctrines:
    1. Direct effect - individual citizens of th EU can invoke the EU law, treaties and, to a lesser extent, secondary legislation as the bases for legal claims in national courts
    2. Supremacy - if national law and EU law are incompatible, it is EU law that should be applied. 
  • Constraints on judicial review in democracies:
    1. Threats of noncompliance
    2. Legislative override
II. Hypotheses
  1. The more credible the threat of override by the European Council, the more likely the court is to rule in favor of the governments' favored position.
  2. The more opposition a litigant government has from other member-state governments, the more likely the court is to rule against that litigant government because the ECJ might be able to count on third-party enforcement.
    • Empirically determined by the opinion of governments for or against the plaintiff on the legal issue in the case, which were indicated by submitted briefs.
  3. The relationship defined in hypothesis 2 is weaker in preliminary ruling proceedings (article 234 cases) that in direct actions. That is, the Court is less sensitive to threats of noncompliance for legal issues from preliminary reference cases (Article 234 cases) than for legal issues from other sources 
III. Data and coding
  • Dataset of decisions on within-case legal issues rather than cases themselves.
  • Each observation in the dataset is a legal issue disposed of by the ECJ when it decides a case. If a case deals with multiple legal  issues, there are recorded as separate observations.
  • The data, as coded, allows the authors to examine both types of threats simultaneously and evaluate their relative influence on judicial behavior; allows an empirical comparison of the two constraints in the same judicial setting.
  • Dependent variable in all the models:
    • 1 if the ECJ rules in favor of the plaintiff; 0 if the ECJ rules against the plaintiff.
IV. Model Specifications
  1. Test for the override threat:
    • Ruling for Plaintiffi = β0 + β1 Net Obsi + ΓZi + ei
  2. Test for the override and noncompliance threats simultaneously:
    • Ruling for Plaintiffi = β0 + β1 Net Obsi + β2 GovLiti + β1 Net Obsi*GovLiti + ΓZi + ei
  3. To isolate legal issues where primarily noncompliance is at issue, the following model is estimated for all legal issues due to infringement proceedings under Article 226:
    • Ruling for Plaintiffi = β0 + β1 Obs for Plaintiffi + β2 Obs for Defendanti ΓZi + ei
  4. The model 3 is also used to isolate legal issues where primarily a threat of override is at issue by focusing on legal issues where neither the plaintiff not the litigant is a member-state government and where the legal issue pertains to a question brought under article 234, a request for a preliminary ruling form a national court. Noncompliance is not a concern in this case because there is no government litigant.
  5. Test for hypothesis 3:
    • Ruling for Plaintiffi =  β0 + β1 Net Obsi + β2 Net Obsi*GovLiti + β3 Net Obs*GovLiti*Article234iΓZi + ei
    • The model specification is the same as in model 2, with the exception of the dummy variable Article234i indicating whether a legal issue is from a preliminary ruling case. However, to test hypothesis 3, separate effects for net observations when a government is a litigant in a preliminary ruling case and when a government is litigant but not in a preliminary ruling case are estimated.
  • i indexes legal issues, Net Obs is the net weighted observations/governments in favor of the plaintiff, GovLit is a dummy variable for the presence of national government as a litigant, Z is the vector of control variables, and e is the error term. The weights are the vote share of the member-states under qualified-majority voting in the Council of Ministers, which is highly correlated with the measures of member-state economic characteristics that reflect their ability to impose economic sanctions for noncompliance, such as national share of intra-EU trade and EU Gross Domestic Product.
  • Obs for Plaintiff indicates the number of government observations for the defendant and Obs for Defendant indicates the number of government observations for the defendant, all weighted by national vote share in the Council of Ministers.
V. Empirical Results
  • Model 1 is consistent with the first hypothesis since β1 > 0.
    • The probability of a ruling for the plaintiff increases with the net number of weighted observations for the plaintiff.
    • As the likelihood rises that a coalition of member-states could form to override a ruling in favor of the defendant, the Court is more likely to rule for the plaintiff.
  • Model 2 results comport with the second hypothesis since the conditional coefficient (β1 + β3) > β1 > 0.
    • The marginal effect of net weighted observations for the plaintiff is positive when a government is not a litigant and net weighted observations have an additional positive impact on ECJ rulings when a government is a litigant. 
    • The additional effect of observations when a government is a litigant is generally greater than the effect of observations when a government is not a litigant.
  • From Models 1 and 2, on average, threats of noncompliance have a greater impact on ECJ rulings than threats of override. This is not surprising because threats of noncompliance are easy to execute relative to threats of override.
  • Model 3 results are consistent with the expectations: β1 > 0, β2 ≤ 0, and β≥ |β2|.
    • Weighted observations for the plaintiff have a positive and statistically significant effect on the probability the ECJ rules for the plaintiff.
    • Weighted observations for the defendant have no statistically significant effect on ECJ rulings for the plaintiff.
    • When a government is a litigant, net observations for the plaintiff in the postive range include infringement proceedings with observations for the plaintiff in the positive range include infringement proceedings iwth observations for the plaintiff, which are highly influential on the Court
    • Infringement proceedings with the net observations for the defendant primarily involve observations for the defendant, which are not influential on the Court's rulings. 
  • Model 4 results are consistent with the expectations: β1 > 0, β2 < 0, and β1 + β2 = 0.
    • For legal issues from Article 234 cases with no government litigant, observations for the plaintiff and the defendant influence ECJ rulings in the expected directions and the effects are statistically significant. 
    • The null hypothesis that the sum of the two effects previously mentioned is zero is cannot be rejected.
  • Model 5 coefficients are inconsistent with expectations, which are (β1 + β2) < (β1 + β2 + β3), but standard errors are too large to determine significance for all coefficients.
VI. Conclusion
  • Threats of noncompliance have a greater impact on ECJ rulings than threats of override.
  • Results indicate that political constraints systematically shape ECJ rulings.
  • The alternative interpretation: if legal precedent, the quality of the legal argument, or the content of relevant treaty articles favor a particular litigant, we would expect the Court, ceteris paribus, to favor that litigant. And, while government observations plausibly act as indicators of government preferences over legal issues, they may also signal the quality of each litigant's case on the merits. If so, then the better the case on the merits for a litigant, the more likely it is that governments will submit observations agreeing with that litigant's position and that the Court will rule for that litigant. So may be positive correlation between government observation and Court rulings even if the Court is not responding to government threats of override or non-compliance.

Thursday, April 7, 2011

Harold Demsetz. 1967. Toward a Theory of Property Rights

Harold Demsetz. 1967. "Toward a Theory of Property Rights," American Economic Review 57, 2 (May): 347-59.

I. The Concept and Role of Property Rights
  1. A primary function of property rights is that of guiding incentives to achieve a greater internalization of externalities. 
  2. All that is needed to internalize externalities is ownership, which includes the right of sale.
II. The Emergence of Property Rights
  1. Property rights develop to internalize externalities when the gains of internalization become larger than the cost of internalization.
  2. New property rights emerge to cope with new externality problems that come with changes in technology, the opening of new markets, changes in social mores, changes in common law precedents, etc.
III. The Coalescence and Ownership of Property Rights
  1. Communal ownership means that the community denies to the state or to individual citizens the right to interfere with any person's exercise of communally-owned rights.
    • Disadvantage:
      •  Results in great externalities and rules out a "pay-to-use-the-property" system; high negotiation and policing costs make ineffective a "pay-him-not-to-use-the-property" system.
  2. Private ownership implies that the community recognizes the right of the owner to exclude others from exercising the owner's private rights.
    • Advantages: 
      • The concentration of benefits and costs on owners creates incentives to utilize resources more efficiently.
      • The cost of negotiating over externalities will be greatly reduced because any negotiations take place between two private owners; under communal ownership, negotiations would have to be between all users of the property.
    • Negotiation options in the market to deal with externalities:
      • Contractual agreement among owners that directly deals with externalities at hand. 
      • The buyout of some owners by others. If there are several externalities, so that several contracts will need to be negotiated, or if the contractual agreements should be difficult to police, then outright purchase will be the preferred course of action.
  3. State ownership implies that the state may exclude anyone from the use of a right as long as the state follows accepted political procedures for determining who may not use state-owned property.
  4. Exception to the assertion that ownership tends to be an individual affair: publicly-held corporatism.
    • Advantage:
      • There might be significant economies of scale in the operation of large corporation if not all owners need to participate in the decisions the company must make.
    • Disadvantage: 
      • Depending on the structure of ownership, there may be some externality difficulties under the law of partnership; externalities depend on the liability of the owners. 

Saturday, April 2, 2011

Avner Greif. 1994. Cultural Beliefs and the Organization of Society

Avner Greif. "Cultural Beliefs and the Organization of Society," Journal of Political Economy 102, 5 (1994): 912-950.

The paper models an economic transaction central to two trading societies (the premodern Muslim and Latin worlds) to examine the relations between culture and societal organization in the related multiple equilibria game.
  1. Cultural Beliefs and the Organization of Society
    • Cultural beliefs: the ideas and thoughts common to several individuals that govern interaction and different from knowledge in that they are not empirically discovered or analytically proved; how individuals (without coordination) expect others to act in various contingencies.
      • Unlike strategies, cultural beliefs are qualities of individuals in the sense that cultural beliefs that were crystallized with respect to a specific game affect decisions in historically subsequent strategic situations. Past cultural beliefs provide focal points and coordinate expectations, thereby influencing equilibrium selection and society's enforcement institutions. 
    • Organizations: the endogenous human constructs that alter the rules of the game and, whenever applicable, have to be an equilibrium.
      • They reinforce the cultural beliefs that led to their adoption.
    • Enforcement institutions are composed of cultural beliefs and the rules of the game. They may change in the long run as individuals attempt to improve their lot by establishing organizations that alter the rules of the game via players, information, payoffs. 
    • Necessary condition for organizational change: those that initiate it expect to gain from it, based on cultural expectations.
    • Once a specific organization is introduced, it influences the rules of historically subsequent games and hence the resulting societal organization. 
  2. Agency Relations and Cultural Beliefs
    • The societies of the eleventh century begin examined:
      1. Genoa - long-distance overseas trade was central to Genoa's economy.
      2. Muslim Mediterranean - Maghribi traders (Jewish merchants) were involved in large-scale, long distance trade all over the Mediterranean. 
    • The merchant-agent commitment problem:
      • Merchants needed to travel overseas to trade centers or obtain merchandise or hire agents who would do so and handle the merchandise. But an agent might embezzle the merchant's goods.
      • For agents to be employed, the organization of society had to enable them to commit themselves ex ante to be honest ex post after receiving the merchant's goods. 
    • Strategies of collectivist and individualist societies for dealing with agency relations:
      • Premise for differences in strategies: in collectivist societies everyone is expected to respond to whatever has transpired between any specific merchant and agent; the opposite holds true for individualist societies and players are expected to be indifferent.
      • In both societies, a merchant hires, for a wage, an unemployed agent whom he hires as long as cheating or forced separation does not occur.
      • Differences: 
        1. Under the individualist strategy, a merchant randomly hires an unemployed agent; under the collectivist strategy, a merchant randomly hires only from among the unemployed agents who have never cheated. 
        2. Under the individualist equilibrium, merchants do not invest to acquire information because history has no value and an agent's wage is independent of it. Under a collectivist equilibrium, the optimal wage is a function of an agent's history and the merchant will invest. 
    • In equilibrium for both individualist and collectivist societies, merchants randomly hire unemployed agents and agents never cheat. 
  3. The Maghribis and Genoese: Origin and Manifestations of Diverse Cultural Beliefs
    • Historical records indicate that cultural "focal points" as well as social and political events in the early development of Magribis and Genoese societies were likely to be instrumental in shaping diverse cultural beliefs and the related equilibria in these groups.
      • Magribis - a collectivist equilibrium was a natural focal point.
      • Genoese - an individualist equilibrium was the natural focal point. 
    • Historical evidence indicates that the Maghribis invested in sharing information and the Genoese did not.
  4. Within the Boundaries of the Game: Cultural Beliefs, Social Patterns or Agency Relations, and Wealth Distribution
    • Under collectivist cultural beliefs, a merchant who cheated in the past (when he was hired as an agent) can no longer rely on collective punishment to deter his agent from cheating him and therefore has to pay a higher wage to keep the agent honest. Merchants acting as agents lose out in the long run, so merchants strictly prefer to hire other merchants as agents.
    • Under individualist cultural beliefs, a merchant who cheats while providing agency services does not have to pay more to his agents in the future and hence a merchant is not motivate to employ another merchant. 
    • Under individualist cultural beliefs, a society reaches a vertical social structure for a larger set of initial conditions than under collectivist cultural beliefs, where a society reaches a horizontal social structure for a larger set of initial conditions. 
      • Maghribi trader relations with horizontal agency relations--merchants hiring merchants to act as agents--confirms this.
      • Genoese traders with vertical agency relations--wealthy merchants rarely, if ever, functioning as agents and poor agents rarely, if ever, functioned as merchants--also confirms this.
    • Vertical agency relations allowed greater upward mobility for the poorer than horizontal relations since in vertical agency relations, the ability to commit is negatively related to wealth. 
  5. Transcending the Boundaries of the Game: Segregated and Integrated Societies
    • A joint economy is segregated if, given the initial conditions, merchants from each economy strictly prefer to hire agents from their own economy.
    • A joint economy is integrated if, given the initial conditions, merchants from at least on economy are indifferent about the original economy of their agents. 
    • In response to geographical expansion of tradeable territories, there is some doubt whether collective punishment works in intereconomy agency relations; the uncertainty contributes to a higher optimal wage in a collectivist economy. As the merchants' cost of establishing intereconomy agency relations is higher than the cost of establishing intraeconomy agency relations, only the latter will be initiated and segregation would result (unless efficiency gains of intereconomy agency relations are sufficiently large).
    • For two individualistic economies, intereconomy and intraeconomy optimal wages are the same because the uncertainty mentioned previously in the last bullet point is irrelevant for the determination of the optimal wage. Efficiency gains from intereconomy agency relations will motivate merchants to establish them.
    • When intereconomy agency relations become possible between a collectivist and an individualist economy, a collectivist merchant would not initiate intereconomy agency relations regardless of the uncertainty regarding the individualist merchants' responses unless efficiency gains from interagency relations are high enough. 
    • Because the collectivist economy's wage is lower, individualist merchants may find it optimal to establish intereconomy relations even if such relations do not imply efficiency gains. 
  6. Transcending the Boundaries of the Game: Organizational Evolution
    • In a collectivist society, coordinating collective punishment and what constitutes "improper" behavior is likely to be based on informal mechanisms such as customs and oral tradition.
    • In an individualist society, formal legal and political enforcement organizations are needed to support collective actions and to facilitate exchange. A formal legal code is likely required to facilitate exchange by coordinating expectations.
  7. Conclusions
    1. Differences in the societal organization of the two trading societies can be consistently accounted for as reflecting diverse cultural beliefs.
    2. The theoretical and historical importance of culture in might determine societal organizations, lead to path dependence of institutional frameworks, and in forestall successful intersociety adoption of institutions.
    3. The collectivist system is more efficient in supporting intraeconomy agency relations and requires less costly formal organizations (such as law courts), but it restricts efficient intereconomy agency relations.
    4. The individualist system does not restrict intereconomy agency relations but is less efficient in supporting intraeconomy relations and requires costly formal organizations.