Showing papers by "Andrei Shleifer published in 1994"

Contrarian Investment, Extrapolation, and Risk

Abstract: For many years, scholars and investment professionals have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This article provides evidence that value strategies yield higher returns because these strategies exploit the suboptimal behavior of the typical investor and not because these strategies are fundamentally riskier. FOR MANY YEARS, SCHOLARS and investment professionals have argued that

Politicians and Firms

Abstract: We present a model of bargaining between politicians and managers that explains many stylized facts about the behavior of state firms, their commercialization, and privatization. Subsidies to public enterprises and bribes from managers to politicians emerge naturally in the model. We use the model and several extensions to understand why commercialization and privatization might work, and what forces contribute to effective restructuring of public enterprises. We illustrate the model using examples from several countries.

The Politics of Market Socialism

Abstract: The debate over market socialism has ignored the importance of the assumptions about the objectives of politicians in determining resource allocation. Theory and evidence suggest that totalitarian socialism does not lead to efficient resource allocation because dictators do not maximize social welfare. But democratic governments have political objectives different from social welfare as well. The authors argue that because these governments command greater resources (have more control rights) under socialism, democratic socialism (even if it could exist) is a less efficient system than democratic capitalism. Thus the political case against market socialism is even stronger than the economic case.

Establishing Property Rights

Abstract: Establishing secure property rights in transition economies amounts to solving two problems: inefficiency structures of control rights over assets and poor contract enforcement. Politicians and bureaucrats still wield excessive control over assets, which results in inefficient underinvestment by entrepreneurs. Corruption is one way of getting around political control, but the drawbacks are considerable, particularly the limited enforceability of corruption contracts. More workable strategies for establishing property rights in transition economies are giving equity to the bureaucrats (and other parties that have control), reforming the civil service, and removing bureaucratic control rights through privatization. Russia's experience shows how privatization, combined with equity incentives for enterprise insiders, transfers control rights from the bureaucrats and stimulates political and economic pressures to protect private property rights.

Competition Policy in Russia during and after Privatization

Abstract: IN SCALE, SCOPE, AND INTELLECTUAL INTEREST, the transformation of the command economies of the former Soviet Union (FSU) and many of its erstwhile allies is an extraordinary event. This essay is concerned with an important aspect of this historic process: the attempt to create a competitive market economy in Russia. Russia is still of considerable strategic importance, and it has the potential to be economically important as well. The Russian federation represented roughly 60-70 percent of the industrial production of the FSU, and it inherited impressive stocks of natural resources and human capital when the Soviet Union was dissolved in December 1991. Unfortunately, Russia also inherited a crumbling economy. As the Soviet system collapsed, Russian output fell, and, even though most prices

Politics of Market Socialism

Abstract: The debate over market socialism has ignored the importance of the assumptions about the objectives of politicians in determining resource allocation. Theory and evidence suggest that totalitarian socialism does not lead to efficient resource allocation because dictators do not maximize social welfare. But democratic governments have political objectives different from social welfare as well. The authors argue that because these governments command greater resources (have more control rights) under socialism, democratic socialism (even if it could exist) is a less efficient system than democratic capitalism. Thus the political case against market socialism is even stronger than the economic case.

Economics and organizational innovation

Abstract: design seems to be spontaneously occurring in Russia. But far and away the most important core investors have been the people who have made a lot of money during the last two or three years, mostly in trading, in export and import business, in intermediating the trade between state enterprises. As in every developing country in the world, the first fortunes are accumulated through trade, and the people who made these fortunes then become investors in industrial companies. The question always arises: Have these people gotten their money in legal ways? I cannot possibly understand why that is an interesting question. These people have accumulated their own fortunes. They are becoming long-term investors in these industrial enterprises. They have to be tough since they Hirshleifer: This session is on Economics and Organizational Innovation. The sequence of speakers and their topics will be as follows: Michael Jensen on "The Modern Industrial Revolution and Failure of Internal Control Systems;" next will be Robert Hall, "Does the Stock Market Send the Right Signals;" number three will be Andrei Shleifer, "Privatization and Governments," with special reference to Eastern Europe; and number four will be William Meckling on "The Evolution of Organizational Forms." Jensen: Thanks, Jack. I want to make three points. First, I will try to convince you that we are in the middle of a full-fledged industrial revolution, that we have been for the last couple of decades, and that it will continue for a couple more. This has broad-reaching implications. It is the biggest change I think we have seen since the mid-19th century in the United States in what Al Chandler characterized as the second industrial revolution. This would be the third, brought about by massive changes in technology and revolutions in political economy that are taking place throughout the world. The implications of these changes are dramatic and are very confusing for policy makers and even for many of us economists and financial economists who have puzzled with these issues for some time. These changes are associated with worldwide excess capacity in a large number of industries. We are having a substantial increase in the average productivity of labor but a decrease in the marginal productivity. There is downward pressure on wages, or at least a downward pressure on the rate of growth of wages, much like what happened in the 19th century. The parallels between these two periods are really quite remarkable. Most important, all of this is making us better off in the aggregate. We cannot help but be better off in the aggregate as efficiency and productivity go up, but there are major pockets of pain and adjustment that must take place. And the policy implications of trying to wind our way through this without getting lost or sidetracked and shooting ourselves in the foot, are major. And third, I will talk about what this excess capacity means for downsizing and exit and how that has revealed, over the last couple of decades, what I believe is the massive failure of the internal control systems in modern corporations. There is major asymmetry between growth and decline. And to me this sets the agenda for the 1990s, how we think about making these organizations efficient. Let me now talk about what I have characterized as the third industrial revolution. If I were to pick a beginning date, I would pick 1973, with the 10-fold energy price increase of 1973 to 1979. Since then, we have had excess capacity in industry after industry--oils, chemicals, autos, tires, steel, computers, airlines, banking, financial services, retailing, real estate, construction, defense, telecommunications, metals, machinery, the list goes on--much as in the 19th century industrial revolution, which brought about mass manufacturing and distribution, also brought about massive excess capacity that could not be wrung out of the system through cartels, pools, or associations. …