First Look

Publications

Capitalism: Its Origins and Evolution as a System of Governance

Abstract

Two systems of governance, capitalism and democracy, prevail in the world today. Operating simultaneously in partially distinct domains, these two systems rely on indirect governance through regulated competition among political as well as economic actors in structures that in many ways parallel the competition found in organized sports. Inevitably these two systems develop as well as transform one another through time, and imbalances of power in either system can lead to the subversion of expected relationships in the other.

This book rejects the simple equation of capitalism with markets or with trade, in favor of a three-level system that embraces factor markets as well those for goods and services and competition between political as well as economic actors. Capitalist competition takes place in markets that exist in legal and regulatory frameworks and are governed by a political authority with the power and legitimacy to empower as well as regulate behavior and punish transgressors as well as redesign institutions. Economic markets constitute a first level in the system, regulatory systems the second level, and political authority the third. This multi-level system could not emerge until sovereign political authorities relinquished some power in order to release the energy of potential economic actors. The critical release of energy came in the factor markets (for land, labor capital, and knowledge), and it required the abandonment of feudalism.

Unlike trade, capitalism spreads by political decisions and by political units such as states. As a consequence, Canada has a different capitalist system than the U.S. despite the existence of free trade in labor and capital as well as goods and services between the two countries. Thus, Canada had no financial crisis in 2007-08.

Capitalism is a system of governance because it embodies human purposes, which differ from one sovereign entity to another. Whereas trade takes place through a largely unguided process like biological evolution with a gradual impact upon the distribution of power among economic and political actors, the emergence of factor markets typically required fundamental reordering of power relationships, as between landowners and their serfs or between consumers and producers, and such changes typically required the mobilization of political power to overcome resistance to such changes. In order to support such developmental changes, the political authorities of capitalism had to acquire the capacity, and the legitimacy to modify institutions as circumstances, including human purposes, evolved.

While the invisible hand of the pricing mechanism can balance supply and demand on a global basis, or in subunits thereof, the visible hand of political authority is essential to the formulation of human purposes and the appropriate modification of institutions to achieve those purposes among the various political units, e.g., states. Thus, capitalism is appropriately described as a system of governance and as a system for balancing supply and demand.

Publisher's link: http://www.springer.com/economics/development/book/978-1-4614-1878-8?changeHeader

Employee Selection as a Control System

Abstract

Theories from the economics, management control, and organizational behavior literatures predict that when it is difficult to align incentives by contracting on output, aligning preferences via employee selection may provide a useful alternative. This study investigates this idea empirically using personnel and lending data from a financial services organization that implemented a highly decentralized business model. I exploit variation in this organization in whether or not employees are selected via channels that are likely to sort on the alignment of their preferences with organizational objectives. I find that employees selected through such channels are more likely to use decision-making authority in the granting and structuring of consumer loans than those who are not. Conditional on using decision-making authority, their decisions are also less risky ex post. These findings demonstrate employee selection as an important, but understudied, element of organizational control systems.

A "Core Periphery" Framework to Navigate Emerging Market Governments—Qualitative Evidence from a Biotechnology Multinational

Abstract

We build on the emerging literature of influence-based models to study how multinational firms can navigate host governments. Our 'core-periphery' framework posits that the actions that an MNC takes with actors in what we call the 'periphery'-comprised of state, quasi-state, and civil society actors-can lead to positive or negative influence with interconnected state actors in a 'core'. There are two mechanisms by which this can happen: engaging the periphery may either change the information set of the core or help align incentives of multiple core actors. Engaging the periphery might be particularly relevant in settings where the institutional framework is still emerging. We build a case study of a multinational firm in the biotechnology sector to illustrate how the core-periphery framework works in multiple emerging markets across institutional differences. The analysis is based on 32 interviews conducted with the CEO and other executives of Genzyme at the corporate headquarters in Cambridge, Massachusetts, and in subsidiaries in Brazil, China, Costa Rica, France, India, and the United States.

Investment versus Propaganda in the Formation of Beliefs about the Argentine Water Privatization

Abstract

Argentina privatized most public utilities during the 1990s but re-nationalized the main water company in 2006. We study beliefs about the benefits of the privatization of water services amongst low- and middle-income groups immediately after the 2006 nationalization. Negative opinions about the privatization prevail. These are particularly strong amongst households that did not benefit from the privatization and amongst households that were reminded of the government's negative views about the privatization. A person's beliefs in the benefits of the water privatization were almost 30% more negative (relative to other privatizations) if his/her household did not gain access to water after the privatization. Similarly, a person's view of the water privatization (relative to other privatizations) was 16% more negative if he/she was read a vignette with some of the negative statements about the water privatization that Argentina's president expressed during the nationalization process. Interestingly, the effect of the vignette on households that gained water is insignificant, while it is largest (and significant) amongst households that did not gain water during the privatization. This suggests that propaganda was persuasive when it had a basis in reality.

Foreign Entry and the Mexican Banking System, 1997-2007

Abstract

What is the impact of foreign bank entry on the pricing and availability of credit in developing economies? The Mexican banking system provides a quasi-experiment to address this question because in 1997 the Mexican government radically changed the laws governing the foreign ownership of banks: the foreign market share therefore increased five-fold between 1997 and 2007. We construct and analyze a panel of Mexican bank financial data covering this period and find no evidence that foreign entry increases the availability of credit. We also find that switching from domestic to foreign ownership is associated with a decrease in non-performing loans and an increase in interest rate spreads, suggesting that foreign concerns bought domestic banks that had been making loans with low interest rates to parties that had a low probability of repayment.