Topics in Microeconomics

Sergei Guriev

Human Capital Foundation Assistant Professor of Corporate Finance

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1Project description and methodology

This project is an eclectic collection of research topics in applied microeconomic theory. The students are supposed to pick one of the topics listed below or pursue a similar project. For all the projects, the methodology is similar: students are supposed to improve on existing literature and build a theoretical model. One exception is the project 6 which is to carry clinical research in corporate finance. This project also presumes building a simple model, but the major contribution of this thesis will be a convincing and comprehensive analysis of a case study of a Russian listed company.

All students will have to attend NES Microeconomics Research Workshop every week; they are also supposed to present their work at the workshop, once or twice during the academic year. There should also be weekly meetings with the project leader. Other NES MA thesis deadlines and requirements also apply.

2Projects

This Section describes individual projects, each should be considered as a basis for an MA dissertation.

2.1Trade networks

This project is to develop a simple theory of structure of trade networks under imperfect trade infrastructure. The approach is to model each consumer, producer, and trading intermediary, and their interaction in an environment where trading takes time and information flows are also not immediate and costless. The main questions are as follows. What are the trade network structures that emerge in equilibrium? Are the equilibria unique? Are these structures stable? How do static and dynamic properties of equilibria depend on imperfections of trade infrastructure?

The project presumes building a simple theory based on the approach in Guriev et al. (1996) (who mostly pursue computer simulations to generate complex dynamic behavior rather than analyze the trade networks theoretically). Kranton and Minehart (2001) build a general theory of buyer-seller networks. See also Delli Gatti et al. (1999) and Kirman and Zimmerman (1999) for literature on interactions between economic agents.

2.2Lease vs sale

Why are some real estate markets based on sales while in other rental contracts dominate? While some cars are sold while others are leased? The recent literature, such as Stolyarov (2002) and Hingal and Lizzeri (2002) makes an emphasis on transaction costs, asymmetric information and adverse selection. There is however an incomplete contract/moral hazard dimension as well. Many features of durable goods to be resold or leased are non-contractible and depend on user’s investment in maintenance. The incentives to invest therefore are determined by current user’s remaining time of using the good. Therefore to model the incentives to invest in quality of goods to be leased/resold one needs to use contracts-on-time approach (as in Guriev and Kvassov, 2004).

This project is to build on the existing literature, identify stylized facts that can and cannot be explained by existing models, and, using contracts on time approach, build a model that would including both adverse selection (to explain transaction costs at each resale/re-lease) and moral hazard (as in contracting-on-time research).

2.3Top- vs bottom-level corruption in a hierarchy

Anecdotal evidence suggests that top-level (also known as ‘political’) corruption and bottom-level (‘bureaucratic’) corruption have very different effects on economic growth. The model in Waller et al. (2002) builds on the ideas in Shleifer and Vishny (1993) to show that top-level corruption may solve problems of coordination between bureaucrats and therefore increase efficiency depending on the structure of hierarchy and bureaucrats’ wages. This project is to endogenize the structure of hierarchy and bureaucrats’ incentives in order to understand the costs and benefits of top- vs bottom-level corruption. The approach would involve a 4-tier hierarchy model (like in Guriev, 1999): (i) customers that can give bribes (ii) bottom-level bureaucrats who administer red tape (like in Guriev, 2004), (iii) top-level bureaucrats who invest effort to monitor bottom-level bureaucrat’s performance, and (iv) public that designs the hierarchy and the bureaucrats’ incentives.

2.4Petty corruption

One of conventional puzzles of the corruption theory is why bribes are relatively low compared to the benefit the bribe-giver gets in exchange for a bribe (Bardhan, 1997). A common explanation is that there are complementarities between bribe-takers and the bribe-giver needs to give too many bribes to obtain what he/she pays the bribes for (Rasmusen and Ramseyer, 1994). This project is to study to what extent this observation while empirically sound may be misleading and is an implication of a measurement bias. One way to proceed is to consider a model where government tries to catch corrupt bureaucrats who may accept bribes for large and small violations. Since there are fixed costs of hiding the bribes, the share of bribes in the surplus of the bureaucrat-agent coalition is higher for small violations. On the other hand, since there are also fixed costs of supervision, government tries to concentrate on large violations. Therefore the observed corruption tends to be biased in favor of smaller shares of bribes. The results should be compared to recent evidence on bribe extortion from small and medium size enterprises (BEEPS 1999, 2002).

2.5State capture vs business capture, incomplete contracts, and vertical integration:

Recent literature on state capture Hellman et al. (2000), Glaeser et al. (2003) emphasizes the capture of political process by private interests. However, in many developing countries (including Russia), it is the government that captures private sector (business capture, as first defined in Parkhomenko and Satarov, 2001). When does state capture dominate business capture? Which one is more dangerous for social welfare and economic growth? How can the two be distinguished theoretically and empirically? This project is going to use models of vertical integration based on incomplete contract theory (Hart, 1995). The ultimate modeling question is to endogenize state vs business capture as the upstream vs downstream integration by explicitly taking into account costs of bribes, lobbying, decision and control rights in the hands of public and private sector players etc. The control structure is not necessarily chosen to maximize joint surplus of the players given the enforcement tools the bureaucrats have and financial constraints, and lack of commitment on both sides (Acemoglu, 2003), in particular, long-term contracts may be infeasible.

2.6Clinical research in corporate governance: the relationship between transparency and internal efficiency

Corporate governance in the narrow sense of this word (Shleifer and Vishny, 1997) is the mechanisms that assure returns to outside investorts’ investments. Most recent definitions (Zingales, 1998, and Becht et al. 2002) argue that corporate governance should also include mechanisms for resolving of internal conflicts in the firm and providing incentives for specific investments by corporate insiders. This suggests that there should be a link between transparency and accountability to outside investors, on one hand, and on internal efficiency, on the other hand. This project is to carry out clinical research on a couple of Russian listed firms to document whether this relationship is important. Many Russian listed firms have dramatically improved their transparency in recent year, while others lagged behind. The goal of this project is to identify a couple of comparable firms (e.g. Yukos vs Lukoil) that pursued different corporate governance approaches and analyze whether and how it improved internal incentives and productivity, not just market valuation. In particular, the project needs to understand the costs of multiple accounting systems, one to report to outsiders and the other one to provide incentives to insiders. The methodology of clinical research is described in Jensen et al. (1989).

3References

Acemoglu, Daron (2003) “Why Not a Political Coase Theorem? Social Conflict, Commitment and Politics.” Journal of Comparative Economics.

Bardhan, Pranab (1997): "Corruption and Development: A Review of Issues", Journal of Economic Literature, Vol. XXXV, No. September: 1320-1346.

Becht, Marco, Patrick Bolton, and Ailsa Roell, 2002, “Corporate Governance and Control,” Handbook of Economics and Finance, Constantinides, Harris and Stulz, eds. North Holland.

BEEPS (1999, 2002) Business Environment and Enterprise Performance Survey, Worldbank,

Delli Gatti, Domenico, Mauro Gallegati and Alan Kirman (1999) Interaction and Market Structure (Ed.) Springer Verlag, Heidelberg.

Glaeser, E., Scheinkman, J., Shleifer, A. (2003). "The Injustice of Inequality" Journal of Monetary Economics: Carnegie-Rochester Series on Public Policy.

Guriev, Sergei (2004) “Red tape and corruption” Journal of Development Economics

Guriev, Sergei, and Dmitry Kvassov (2004) Contracting on Time.

Guriev, Sergei (1999). A theory of informative red tape with an application to top-level corruption. NES WP/99/007- 27 p. available at

Guriev, Sergei, Igor Pospelov and Margarita Shakhova Self-Organization of Trade Networks in an Economy with Imperfect Infrastructure. Available at also available in Russian at NES library as С.М.Гуриев , И.Г.Поспелов, М.Б.Шахова, Имитационная модель самоорганизации торговых сетей. Сообщения по прикладной математике, М.: ВЦ РАН , 1996.

Hart, Oliver (1995) Firms, Contracts and Financial Structure. Oxford University Press.

Hellman, Joel S., Geraint Jones and Daniel Kaufmann 2000, Seize the State, Seize the Day: State Capture, Corruption and Influence in Transition, World Bank Policy Research Working Paper No. 2444.

Hendel, Igal, and Alessandro Lizzeri (2002) “The Role of Leasing under Adverse Selection”, Journal of Political Economy, February 2002.

Jensen, Michael C., Eugene F. Fama, John B. Long, Jr. , Richard S. Ruback, G. William Schwert, Clifford W. Smith, Jr. and Jerold Warner (1989)“Clinical papers and their role in the development of financial economics", Journal of Financial Economics, Volume 24, Issue 1, September 1989, Pages 3-6. available at

Kirman, A., and Zimmermann, J.-B., (2001) Economics with Heterogeneous Interacting Agents. GREQAM/EHESS, Marseille, France (Eds.)

Kranton, Rachel and Deborah Minehart (2001) A Theory of Buyer-Seller Networks, American Economic Review

Parkhomenko, S., and G. Satarov (2001). Diversity of countries and diversity of corruption INDEM, Moscow, in Russian,

Rasmusen, Eric, and Mark Ramseyer (1994) Cheap Bribes and the Corruption Ban: A Coordination Game among Rational Legislators Public Choice, 78(3-4), 305-27

Shleifer, Andrei and Robert Vishny (1993) Corruption. Quarterly Journal of Economics.

Shleifer, Andrei, and Robert W. Vishny, 1997, A Survey of Corporate Governance, Journal of Finance 52, 737-83.

Stolyarov, Dmitry (2002) Turnover of Used Durables in a Stationary Equilibrium: Are Older Goods Traded More? Journal of Political Economy, v110, n6, 1390-1413

Waller, Christopher, Thierry Verdier and Roy Gardner (2002) Corruption: Top Down or Bottom Up? Economic Inquiry 40(4) pp. 688-703.

Zingales, Luigi (1998) Corporate Governance. New Palgrave Dictionary of Economics and the Law.