Economics of Information and the Theory of Economic Development

This paper shows how recent developments in the Economics of Information can provide insights into economic relations in less developed countries, and how they can provide explanations for institutions which, in neoclassical theory, appear anomalous and/or inefficient. Sharecropping and other tenancy relationships in the rural sector and wage determination and urban unemployment are both investigated within this perspective.

The General Theory of Tax Avoidance

This paper outlines a general set of principles for tax avoidance. Most of at least the common tax avoidance schemes can be reinterpreted as making use of one or more of these principles. Four such methods are described. In a perfect capital market, these methods would enable the astute taxpayer to eliminate all taxation on capital income. The fact that the tax system raises revenue is attributed to lack of astuteness of the taxpayer and/or lack of perfection of the capital market. Accordingly, models which attempt to analyze the effects of taxation assuming rational, maximizing taxpayers working within a perfect capital market may give misleading results.A full analysis of tax avoidance cannot be conducted within a partial equilibrium model; transactions which reduce one individual's tax liability may at the same time increase another's.We delineate tax avoidance schemes which reduce the aggregate tax liabilities of the participants. Much of the"general equilibrium" gain from tax avoidance arises from differences in tax rates, both across individuals and across classes of income. Our analysis is shown to have implications both for patterns of ownership of assets and the timing of transfers.

Money, Imperfect Information and Economic Fluctuations

This paper summarizes the macro-economic and, in particular, monetary and financial market implications of recent developments in the micro-economic theory of imperfect information. These micro-economic models which lead to credit-rationing on the one hand and limitations in the availability of equity type financing on the other can account for a wide range of observed business cycle and monetary phenomena. These include (a) unemployment, (b) the existence of Keynesian-type multiples, (c) the observed lack of production smoothing in response to cyclical fluctuations in demand, (d) the impact of monetary policy on business activity despite the absence of significant changes in real interest rates, and (e) price rigidities which arise from rational firm decisions (not as an a priori assumption).

Equilibrium fictions : a cognitive approach to societal rigidity

This paper assesses the role of ideas in economic change, combining economic and historical analysis with insights from psychology, sociology and anthropology. Belief systems shape the system of categories ("pre-confirmatory bias") and perceptions (confirmatory bias), and are themselves constrained by fundamental values. The authors illustrate the model using the historical construction of racial categories. Given the post-Reformation fundamental belief that all men had rights, colonial powers after the 15th century constructed ideologies that the colonized groups they exploited were naturally inferior, and gave these beliefs precedence over other aspects of belief systems. Historical work finds that doctrines of race came into their own in the colonies that became the United States after, not before, slavery; that out of the"scandal of empire"in India emerged a"race theory that cast Britons and Indians in a relationship of absolute difference"; and that arguments used by the settlers in Australia to justify their policies toward the Aborigines entailed in effect the expulsion of the Aborigines from the human race. Racial ideology shaped categories and perceptions in ways that the authors show can give rise to equilibrium fictions. In the framework of this paper, technology, contacts with the outside world, and changes in power and wealth matter not just directly but because they can lead to changes in ideology.Cultural Policy,Race in Society,Educational Sciences,Cultural Heritage&Preservation,Ethics&Belief Systems

Money, Credit, and Business Fluctuations

This paper provides a critique of standard theories of money, in particular those based on money as a medium of exchange. Money is important because of the relationship between money and credit. The process of judging credit worthiness, in which banks play a central role, involves the collection and processing of information. Like many other economic activities involving information, these processes are not well described by means of standard production functions. Changes in economic circumstances can have marked effects on the relevance of previously accumulated information and accordingly on the supply of credit. Changes in the availability of credit may have marked effects on the level of economic activity, while changes in real interest rates seem to play a relatively minor role in economic fluctuations. This alternative view has a number of implications for policy, both at the macro-economic level (for instance, on the role of monetary policy for stabilization purposes and the choice of targets) and at the micro-economic level.

After the Big Bang? Obstacles to the emergence of the rule of law in post-communist societies

With the collapse of communism in Eastern Europe and the Soviet Union in 1989-91, many economic reformers supported"Big Bang"privatization-the rapid transfer of state-owned enterprises to private individuals. It was hoped that Big Bang privatization would create the conditions for a demand-led evolution of legal institutions. But there was no theory to explain how this process of institutional evolution, including a legal framework for the protection of investors, would occur and, in fact, it has not yet occurred in Russia, in other former Soviet Union countries, in the Czech Republic, and elsewhere. A central reason for that, according to many scholars, is the weakness of the political demand for the rule of law. To shed light on this puzzle, the authors consider a model where the conditions for the emergence of the rule of law might be interpreted as highly favorable. Individuals with control rights over privatized assets can collectively bring about the rule of law simply by voting for it. These individuals are concerned with the wealth they can obtain from the privatized assets, and have two alternative strategies: building value and stripping assets. Building value under the rule of law yields higher benefits to a majority than stripping assets under no rule of law. But uncertainty about when the rule of law will be established may lead some individuals to choose an economic strategy-stripping assets, including converting corporate assets to private use-that gives them an interest in postponing the establishment of the rule of law. And therefore in the succeeding period, the rule of law may again not be in place, and so again individuals may strip assets. If they do, some of them may again have an interest in postponing the establishment of the rule of law. And so a weak demand for the rule of law can persist. The contribution of the paper is to show that the view that once stripping has occurred, the strippers will say"enough"and by supporting the rule of law seek public protection of their gains, is flawed. By abstracting from the obvious problem that strippers who obtain great wealth can buy special favored treatment from the state, the model highlights two less obvious flaws in the optimistic view about the Big Bang: First, that the asset-strippers can remove the assets from exposure to further stealing, and in that case they do not care about public protection for their gains. And second, that the perceived justice of a system is important to gaining the cooperation of those involved in the process of producing the rule of law (judges, regulators, jurors, potential offenders). Accordingly, state protection of asset strippers may be infeasible, even under an ostensible rule of law. Knowing this, strippers will be less supportive of the rule of law. The model makes one further point: what is at issue is how fast the rule of law will emerge. The presumption of the Big Bang strategy was that the faster state property was turned over to private hands, the faster a true market economy, including the rule of law, would be established. The analysis shows that, even if eventually a rule of law is established, the Big Bang may put into play forces that delay the establishment of the rule of law. The tortoise once again may beat the hare! Finally, the authors analyze the impact of certain policies, such as the particular structure of privatization and monetary policy. Policies that enhance the returns to investment and wealth creation rather than assetstripping not only serve to strengthen the economy in the short run, but enhance political support for the rule of law and thus put it in a position for stronger long-term growth.Corruption&Anitcorruption Law,Environmental Economics&Policies,Economic Theory&Research,Legal Products,Labor Policies,Legal Products,Environmental Economics&Policies,Economic Theory&Research,Corruption&Anitcorruption Law,Judicial System Reform

Exiting a lawless state

An earlier paper showed that an economy could be trapped in an equilibrium state in which the absence of the rule of law led to asset-stripping, and the prevalence of asset-stripping led to the absence of a demand for the rule of law, highlighting a coordination failure. This paper looks more carefully at the dynamics of transition from a non-rule-of-law state. The paper identifies a commitment problem as the critical feature inhibiting the transition: the inability, under a rule of law, to forgive theft. This can lead to the perpetuation of the non-rule-of-law state, even when it might seem that the alternative is Pareto-improving.Public Sector Corruption&Anticorruption Measures,National Governance,Labor Policies,Gender and Law,Bankruptcy and Resolution of Financial Distress

Technological Change, Sunk Costs, and Competition

macroeconomics, technological change

Credit rationing, tenancy, productivity, and the dynamics of inequality

Why, when given the same resources, might productivity be lower on farms operated through sharecropping than on owner-run farms? The reason is that sharecropping, much less wage contracts, cannot overcome the divergence of interests between those who till the land and those who own it. Only land redistribution can do that. This paper presents notes toward a general equilibrium theory of land tenancy that suggest how changes in technology and publicly provided infrastructure can affect the equilibrium distribution of land in countries where credit is rationed. When credit to famers is rationed, changes in technology can increase the inequality in landholdings - with a long term increase in share tenancy. This is turn might reduce productivity, at least partially offsetting the initial improvements. The paper suggests that the development of effective rural financial institutions would reduce the likelihood of these negative effects on equality and productivity. It further cautions though that past attempts in creating such institutions have failed because of a lack of accountability and of enforcement procedures.Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Economic Growth,Municipal Financial Management