Showing papers on "Opportunism published in 2000"

Opportunism in Interfirm Relationships: Forms, Outcomes, and Solutions

Abstract: Much of the recent literature on interfirm relationships has focused on strategies for controlling opportunism. Somewhat surprisingly, little attention has been paid in this literature to the opportunism construct itself. Specifically, prior research has failed to recognize the different types of behavior that are hidden behind the general opportunism label. As a consequence, the knowledge of strategies for managing opportunism remains incomplete. The authors review the original and emergent conceptualizations of opportunism and illustrate them using actual industry cases. The authors also develop a conceptual framework of governance strategies that can be used to manage different forms of opportunism.

Managing marketing channel opportunism: The efficacy of alternative governance mechanisms

Abstract: The authors examine three governance mechanisms according to how well they mitigate opportunism in marketing channels. Using the U.S. hotel industry as the research context, the authors investigate how opportunism is limited by (1) ownership, (2) investment in transaction-specific assets, and (3) norms of relational exchange. They also investigate how various combinations of these governance mechanisms affect opportunistic behavior in hotel channels. Overall, the results generally support emphasizing relational norms in managing opportunism in marketing channels. The results also indicate that opportunism can be exacerbated when ownership or investments in transaction-specific assets are accentuated as governance mechanisms.

"Globalization" and Vertical Structure

Abstract: This paper analyzes the effects of international openness on vertical integration. Vertical integration can confer a negative externality, by thinning the market for inputs and thus worsening opportunism problems; this induces strategic complementarity and multiple equilibria in the integration decision, thus providing a theory of different industrial systems or industrial cultures in ex ante identical countries. International openness thickens the market, facilitating leaner, less integrated firms, thus providing gains from international openness quite different from those that are familiar from trade theory. This may be taken as one theory of outsourcing, downsizing, and Japanization as consequences of globalization.

Pragmatic Collaborations: Advancing Knowledge While Controlling Opportunism

Abstract: This paper starts from the observation that firms are increasingly engaging in collaborations with their suppliers, even as they are reducing the extent to which they are vertically integrated with those suppliers. This fact seems incompatible with traditional theories of the firm, which argue that integration is necessary to avoid the potential for hold-ups created when non-contractible investments are made. Our view is that pragmatist mechanisms such as benchmarking, simultaneous engineering and "root cause" error detection and correction make possible "learning by monitoring"--a relationship in which firms and their collaborators continuously improve their joint products and processes without the need for a clear division of property rights. We argue that pragmatic collaborations based on "learning by monitoring" both advance knowledge and control opportunism and thus align interests between the collaborators. Copyright 2000 by Oxford University Press.

From arms‐length to collaborative relationships in the supply chain: An evolutionary process

Abstract: Buyer‐supplier relationships play an important role in an organization’s ability to respond to dynamic and unpredictable change. If the relationship is too restrictive, flexibility will be difficult to achieve and, if it is too lenient the risk of opportunism will be present. This paper provides a framework for understanding how buyer‐supplier relationships have evolved over the past two decades from transaction processes based on arms‐length agreements to collaborative processes based on trust and information sharing. To achieve this objective, buyer‐supplier relationships are reviewed from the perspectives of transaction cost theory, strategy‐structure theory and resource‐based theory of the firm. Findings from early supply chain research are contrasted with the findings of more current research to provide a better understanding of how these relationships have changed. Current theory is extended by offering two proposals that test the influence of trust and information sharing and a third proposal that rejects the notion that supply chain alliances lead to monopolistic practices.

Sourcing parts of complex products: Evidence on transactions costs, high-powered incentives and ex-post opportunism

Abstract: This paper revisits evidence on the correlates of sourcing decisions in the US auto industry to see whether adoption of new contracting terms and early involvement of suppliers in design activities (e.g. “relational contracting”) yields different results as compared to previous findings. Previous studies find that US auto firms insource complex parts that require investments in specific assets. Absent large differences in production costs, the results suggest that transactions costs associated with external suppliers exceed transactions costs associated with internal suppliers (e.g. loss of high powered incentives). Using data on 156 sourcing decisions for process tooling (dies) of a new car program we find that under the new relational contracting regime, transaction cost theory continues to have explanatory power for sourcing decisions; however, attributes that favored insourcing in previous studies favor outsourcing in this setting. Moreover, more complex subassemblies are associated with fewer distinct suppliers than expected — evidence of a tendency to co-locate decision rights to reduce transactions costs related to system interactions. After controlling for transaction characteristics that are associated with the sourcing decision, we find no evidence that outsourcing is associated with increased ex post opportunism by the firm (e.g. agreement about contract completion); however, outsourced parts are submitted by suppliers for evaluation significantly later than insourced parts (e.g. delivery holdup).

The Uncertain Foundations of Transaction Costs Economics

Abstract: Uncertainty is a core assumption in transaction costs theory. It forms the basis of the explanation of transaction costs and also provides a vital link in the conceptual analysis of the transition from market coordination to internal organization. Yet, the term itself has been relatively neglected in transaction costs economics; issues of opportunism and bounded rationality have tended to assume a much higher status in analysis. The founding figures of transaction costs economics, Ronald Coase and Oliver Williamson, have steered away from offering a detailed explanation of the nature and origins of uncertainty. Coase, in particular, passes over the Knightian distinction between risk and uncertainty, leaving unclear his own position on uncertainty. Williamson's approach places great emphasis on bounded rationality, creating problems in distinguishing uncertainty from complexity. In neither case is close attention paid to the essential "unknowable" character of future events and outcomes-the endemic lack of knowledge about a future world still to be created. This paper reassesses the transaction costs explanation of uncertainty. It develops arguments along two fronts. The first looks in detail at how Coase and Williamson conceptualize uncertainty in their respective analyses of economic organization. Both see uncertainty as conditional in effect, being curtailed with other sources of transaction costs through an appropriate mix of market and internal governance. Williamson follows Coase in emphasizing the efficiency attributes of markets and hierarchies, showing the equilibrium conditions that allow for the achievement of minimum transaction costs under both governance mechanisms. Their approach remains firmly rooted in orthodoxy, building toward a general equilibrium conception

The Price of Law: How the Market for Lawyers Distorts the Justice System

Abstract: This paper begins with the question, Why do lawyers cost so much? The analysis is an investigation of the imperfections in the market for lawyers, imperfections that have been largely overlooked by focus on either the model of perfect competition or the impact of artificial barriers to entry into the provision of legal services. The paper catalogues multiple sources of imperfection: the nature of the incentives and mechanisms at work to determine the level of complexity in the system; the extent to which complexity and uncertainty make legal services into credence goods par exellence; the winner-take-all and tournament nature of the competition among lawyers; the sunk costs of lawyer-client relationships and hence the potential for opportunism and the limited potential for conventional market mechanisms to control opportunism; the incremental nature of legal fees--which structures legal expenditures as a sunk cost auction in which the cost of services can easily and rationally exceed the amount at stake; and three sources of monopoly--the familiar monopoly established by artificial barriers to entry, the "natural" monopoly arising from the limited supply of individuals in the economy with the cognitive skills necessary to engage effectively in competitive legal reasoning, and the state's monopoly over coercive dispute resolution. The analysis uncovers deeply disturbing implications for justice from the economics of the market for lawyers. The price dynamics of the system operate within the framework of a unified profession/unified legal system that essentially puts individual clients--with justice interests at stake--into a bidding contest with corporate clients with efficiency (more generally, market) interests at stake. Corporations by definition are aggregations of individual wealth and, as a consequence, are able to bid for the resources; they also are a richer feeding ground for the wealth extraction generated by the imperfections/monopoly aspects of the market for lawyers. This is not an ethical critique of lawyers; it is the implication of ordinary economic response to incentives structured by a non-competitive market. The economic dynamics of the market for lawyers operate like a vacuum, drawing the resources of the system into the corporate sphere, in the service (from a public perspective) of efficiency, and away from the individual sphere, in the service of justice as in the relationships between the individual and the state, the market, the family, the community and so on. This stands on its head the lexicographic relationship between efficiency and justice: efficiency is of normative significance only to the extent it promotes individual welfare through just social relations. The implications of the economic analysis in the paper are supported by the empirical evidence we have about the structure of the legal profession and the changes over the past several decades. The profession is roughly divided into two segments--one serving business clients and one serving individual clients. The business segment is populated by lawyers who graduated from elite institutions, who are well-connected and influential in the profession, who charge high fees and earn high incomes, and who are perceived to be in short supply. These lawyers work in large firms or high-end boutiques and are increasingly likely to be specialized. Their work is perceived to be of the highest level of prestige by all members of the profession. The personal segment is populated by lawyers who graduate from lower-tier schools, charge lower fees and often flat fees set in apparently competitive fashion providing largely routine, non-contested legal services such as house closings, uncontested divorces and wills. Their work is perceived, by them and the rest of the profession, as low prestige. Lawyers in this segment tend to work in solo practice or small general practice firms. The supply of lawyers in this segment is perceived to exceed demand, and there is evidence of un/underemployment and falling prices. The allocation of total hours spent by lawyers on legal work is increasingly skewed towards the business segment of the profession, and thus towards the efficiency and away from the individual justice goals of the justice system.

Running up the Bid: Modeling Seller Opportunism in Internet Auctions

Abstract: Although the Internet is great for transferring information, transactions in Internet auctions have a greater information asymmetry than corresponding transactions in traditional environments because current auction market mechanisms allow the seller to remain anonymous and to easily change identities. Buyers must rely on the seller's description of a product and ability to deliver the product as promised. Internet auction environments make opportunistic behavior more attractive to sellers because the chance of detection and punishment is decreased. In this research, we examine auction data to see the effect of opportunism in the online auction environment. Introduction E-commerce (EC) offers a variety of new business models, such as long-lasting auctions or 24-hour per day automated order taking. These new models are designed to generate and sustain revenue by taking advantage of the unique characteristics of the World Wide Web. Though the trade media has viewed EC as "the next big thing," its growth has been below expectations. Most companies have Web sites to provide information, but only 4% of organizations currently generate revenue using EC technology, up from 3% in 1998 (Littlewood 1999), implying low customer demand for EC services from most customers. Many media analysts attribute the lower-than-expected EC growth to low levels of trust among consumers (Rankin 1999). Many observers have written about how EC benefits the consumer because of reduced search costs (Bakos 1997; Choudhury 1998). However, what needs to be better recognized by the research literature is how EC opportunism is facilitated by an increase in information asymmetry between the online buyer and the online seller. Economics defines information asymmetries as instances in which there is knowledge that one party has and that another other party lacks in a variety of decisionmaking settings (e.g., production, investment, resource allocation, contracting, and so on). Information asymmetries often lead to various kinds of problems in these settings, including inappropriate decisions and outcomes, unfair exchanges of value, and loss of social welfare. They also can occur in sales transactions, where buyers and sellers are involved. The asymmetry in information can occur with respect to knowledge about product quality or knowledge about behavior that may occur even after the sale. As a result, information asymmetries can lead to transactions in which only one side benefits. They can also lead to fraud, cheating, misrepresentation of self or product, or other moral hazards benefiting one party in a transaction at the expense of another (Tirole 1988). Although EC buyer behavior has been investigated (Lee 1998), less work has been done to investigate changes in seller behavior, especially in Internet auctions. In this research, we propose and test a model that shows how sellers in Internet auctions behave in the absence of identification, personal contact, and a higher uncertainty on the part of the buyer about the product. We explore the following research questions: • Why and how does the increase in information asymmetry brought about by Internet auction transactions change seller behavior? • How does the buyer in an Internet auction respond to this increase in information asymmetry? • How does information asymmetry affect prices in online auctions, and social welfare, more generally? We employ a software agent to gather data from online auctions, extending prior work by Kauffman, March, and Wood (1999). We analyze this data to show how Internet auction sellers react to the customer when information asymmetry increases.

Nonprofit and for-Profit Partnerships: Rationale and Challenges of Cross-Sector Contracting:

Abstract: Increasingly, nonprofit, for-profit, and public organizations have been cooperating in producing and distributing a wide range of goods and services. In many cases, the partnerships have arisen from the recognition that different activities are best suited to different governance structures. Yet, working through a cross-sectoral partnership can bring with it complicated managerial issues. This article explores partnering in two important sectors: higher education and welfare reform. In both areas, cooperation across the sectors is widespread and follows lines of comparative advantage. At the same time, there is ample evidence in our cases of classic transactions costs in implementing cross-sectoral partnerships. The article explores ways in which organizations deal with problems of opportunism and imperfect information in contracting across the sectors.

CEO Dismissal in Venture Capital-Backed Firms: Further Evidence from an Agency Perspective

Abstract: This study uses agency theory to examine CEO dismissal in venture capital-backed firms. Prior applications of agency theory have focused on reducing managerial opportunism by aligning the interests...

Strategic management in European universities in an age of increasing institutional self reliance

Abstract: This paper contrasts the emphasis onplanning in universities when funding from the statewas stable and resources followed student numbers,with the emphasis on strategic management when statefunding is declining and universities are of necessitymuch more market orientated. Planning processes couldwork well when universities had a predictable future,but are less appropriate when the climate isturbulent. The paper suggests that the following arethe key words for successful universities in the newenvironment, competitiveness, opportunism, incomegeneration and cost reduction, relevance, excellenceand reputation. It goes on to argue that thisframework of key characteristics demands a newapproach to strategic management in universitiesrequiring universities to take a holistic view oftheir activities, to coordinate institutionalstrengths so that they reinforce one another and tocreate machinery whereby academic, financial andphysical planning strategy is decided on an integratedbasis.

Risk, Opportunism, and Structural Holes: How Headhunters Manage Clients and Earn Fees

Abstract: Headhunters find candidates for jobs. They are paid by their clients—employers—when the candidates they generate accept job offers. Headhunters, therefore, resemble other third-party agents or brok...

Putnam's Social Capital Theory Goes East: A Case Study of Western Ukraine and L'viv

Abstract: attempts to test Putnam's theory explicitly in the analysis of post-socialist politiesmost notably former East Germany-attention has been directed more towards his equilibrium thesis of 'virtuous' and 'vicious' circles. While stressing Putnam's neglect of factors such as institutional design and third-party enforcement,4 the focus in current analyses has been less on the issue of social capital as such and the micro-sociological underpinnings of non-communitarian social capital. The latter is the topic of this article. Therefore, rather than asking ourselves 'what is the importance of social capital to successful democratisation', the proper question to pose in our case should be 'exactly what is it in the nature of social capital in post-socialist societies that makes people less inclined to invest trust in formal democratic institutions?' Putnam's own reply is that 'sanctions that support norms of reciprocity against threat of opportunism are less likely to be imposed upwards and less likely to be acceded to, if imposed' in the kind of particularistic and vertical networks from which negative social capital breeds.5 Contrary to Putnam's argument, though, we hold that lack of trust in formal institutions is not due primarily to difficulties in implementing sanctions in social networks. Although Putnam was right in focusing on the exchange relations that constitute the backbone of these networks, the important point is actually that communitarian and non-communitarian social capital draw on two different modes of reducing social transaction costs. It is this difference rather than the problem of sanctions that accounts for the difficulties of transforming non-communitarian social

Managerial opportunism and the capital structure decisions of property companies

Abstract: The focus of this paper is on the problem of managerial opportunism in the corporate governance of UK quoted property companies. Agency conflicts exist between firm managers and owners because of the separation of ownership from management. Consequently, managers pursue activities that enhance their interests rather than that of the shareholders’. The empirical investigation of this paper is divided into two sections. The first part examines the ownership structure of 83 UK quoted property companies between 1989 and 1995, revealing that close to a quarter of the common shares issued by the companies are held by the managers. The gap between ownership and management appears to increase with firm size, risk and growth rate but decrease with corporate performance. In the second section, logit modeling is employed to examine 110 security issues of the companies during the study period. The evidence shows that ownership structure has an influence on the debt‐equity choice of property companies. Consistent with the findings of previous studies, the study also reveals that the capital structure choice is dictated to a large extent by company size, issue size, and condition of the security market. The empirical analysis also suggests that property companies make their financing decisions as though they have a target capital structure in mind.

Industry Self-Regulation Without Sanctions: The Chemical Industry's Responsible Care Program

Abstract: Industry self-regulation, the voluntary association of firms to control their collective action, has been proposed as a complement to government regulation. Proponents argue that the establishment of such structures may institutionalize environmental improvement, while critics suggest that without explicit sanctions such structures will fall victim to opportunistic behavior. In a study of the Chemical Manufacturer Association’s Responsible Care program we investigate the predictions of these two contradictory perspectives. Our findings highlight the potential for opportunism to overcome the isomorphic pressures of even powerful self-regulatory institutions and suggest that effective industry self-regulation is difficult to maintain without explicit sanctions.

The Structure of Optimal Trust: A Comment and Some Extensions

Abstract: The article presents a response to an article in an earlier issue of “Academy of Management Review” from Wicks, Berman, and Jones on the structure of optimal trust. The authors appreciate the article's strengthening of the bond between trust theory and the practical business world, but feel that two issues have been left out of the discussion. The authors assert that trust is part of an interconnected group of concepts, such as reciprocity, opportunism, and forebearance. Additionally, the authors contend that the logic of trust can be framed mathematically. Trust in the business context is a field that is ripe for further study.

Private investment and political uncertainty

Abstract: Recent theoretical and empirical work has demonstrated a clear negative link between macroeconomic and political uncertainty and levels of private investment across countries. This result raises the question what institutions might help reduce this uncertainty, in particular by allowing host governments to limit their own possibilities to act opportunistically with respect to investors. Some have argued that governments might benefit from joining a multilateral investment agreement, but there remain doubts both about the enforceability and the desirability of such an accord. An alternative possibility, proposed in a seminal article by North and Weingast (1989), is that political institutions characterized by checks and balances can allow governments to credibly commit not to engage in ex post opportunism with respect to investors. In this paper I propose a modified version of this hypothesis and test it using new cross-country data on political institutions. I also use a quantile regression technique which allows the estimated effect of political institutions to vary across countries and over time.

Genie in a Bottle? Assessing Managerial Opportunism in International Securities Transactions

Abstract: How should national securities regulators respond to the growing trend of foreign listing and cross-border trading of stocks? This Article argues that regulatory concern and cooperation are warranted in light of the potential for opportunistic behavior by corporate managers and holders of control blocks. It assesses the likelihood and potential severity of managerial opportunism in the particular context of international securities transactions. Metaphorically, such transactions may be seen as bottles with an occasional genie inside. The analysis revolves around the motivations for listing a company?s stocks on a foreign market. The foreign listing decision is motivated by a number of factors, most of which work to the benefit of the company and its shareholders. The existing literature, however, fails to provide a clear picture of the role that managerial self-interest may play in the decision to make (or avoid) a foreign listing and in the choice of the particular foreign market. Theoretical models are not unambiguous and empirical evidence is badly lacking. Existing evidence, however, indicates that the foreign listing decision is likely to be influenced by candidate markets' securities regulation regimes on disclosure and insider trading, which may be purposefully onerous to the management. Consequently, unmitigated regulatory competition based on a presumed international "race for the top" cannot be relied on completely to remedy the problem.

The management of matches : A research program on solidarity in durable social relations

Abstract: We outline a research program on solidarity in matches, i.e. durable social relations between two or, to generalize slightly, a few parties. Examples of matches include relations between natural persons such as households as well as corporate actors such as research and development alliances, or buyer-supplier relations between firms. A typical feature of matches is that the partners are interdependent with partly common and partly conflicting interests. This interdependence induces risks. A paradigmatic risk and a classical example of solidarity problems is that cooperation in matches is often problematic: realizing the joint interests of the partners requires cooperation which is problematic due to individual incentives for opportunism. Trust problems are a typical case and the Prisoner's Dilemma is a well-known formal model of these risks. We discuss how rational, i.e. incentive-guided and goal-directed actors cope with risks, or how they manage their match. In particular, we highlight how the assumption of rational behavior, together with assumptions on the social embeddedness of matches and transactions in matches, can be used to generate hypotheses on the management of cooperation problems.

Institutional barriers to electronic commerce: An historical perspective

Abstract: Although electronic commerce is currently a relatively small fraction of overall sales, the dollar amounts are significant and growing rapidly. Future growth, however, is likely to be limited by two factors - technical barriers and issues of trust and risk. Technical barriers such as delivery, bandwidth, and standardization are already beginning to erode. Problems of trust and risk require as yet undeveloped institutional solutions. The paper explores the possible form of these institutions by drawing lessons from institutions that emerged historically to address opportunism in remote commerce. Once such institutions emerge, remote commerce will begin to have real tax implications for states. The paper describes the institutional changes that will have to occur to address the tax shortfall once it becomes fiscally and therefore politically noticeable.

Private investment and political uncertainty

Abstract: Recent theoretical and empirical work has demonstrated a clear negative link between macroeconomic and political uncertainty and levels of private investment across countries. This result raises the question what institutions might help reduce this uncertainty, in particular by allowing host governments to limit their own possibilities to act opportunistically with respect to investors. Some have argued that governments might benefit from joining a multilateral investment agreement, but there remain doubts both about the enforceability and the desirability of such an accord. An alternative possibility, proposed in a seminal article by North and Weingast (1989), is that political institutions characterized by checks and balances can allow governments to credibly commit not to engage in ex post opportunism with respect to investors. In this paper I propose a modified version of this hypothesis and test it using new cross-country data on political institutions. I also use a quantile regression technique which allows the estimated effect of political institutions to vary across countries and over time.

Trust, Organizational Controls, Knowledge Acquisition from the Foreign Parents, and Performance in Vietnamese International Joint Ventures

Abstract: Successful adaptation in strategic alliances "calls for a delicate balance between the twin virtues of reliability and flexibility" [Parkhe 1998]. On one hand, the joint venture must be flexible enough to respond to the uncertainties of competitive business environments because it is not feasible to plan for every possible contingency. Yet, on the other hand, unfettered flexibility invites dysfunctional behavior, such as opportunism and complacency. This delicate balance accompanies a parallel balance between trust and control of the joint venture. The primary goal of this study is to empirically examine this relationship in the context of Vietnamese international joint ventures (IJVs) by building on the model of knowledge acquisition and performance in IJVs established by Lyles and Salk [1996]. This study makes three major contributions to the literature. First it confirms several findings of the original Lyles and Salk study [1996]. Second, we strengthen Lyles and Salk's original model by incorporating multiple measures of both interorganizational trust and control as independent variables. Finally, this study represents one of the first in-depth examinations of business in the emerging Vietnamese economy.

Just‐cause provisions, severance pay, and the efficiency wage hypothesis

Abstract: A simple model of employment contracting is employed to examine the effectiveness of just-cause provisions in alleviating employer opportunism in two types of efficiency wage contracts—standard contracts, in which wages exceed the worker's marginal contribution, and deferred wages, which are paid after a period of tenure in the firm. It is argued that just-cause employment policies are necessary and sufficient to prevent employer opportunism when standard efficiency wages are utilized. However, just-cause policies are not sufficient to deter employer opportunism when employment contracts are of the delayed-payment type. In these contracts, other contractual provisions, such as severance provisions, are also necessary. Copyright © 2000 John Wiley & Sons, Ltd.

Managing marketing relationships: Making sure everyone plays on the team

Abstract: Much of the literature relating to managing marketing relationships focuses on limiting opportunistic activities by one or both partners in a relationship. Opportunistic behavior occurs when one partner seeks a short-term gain in a way that may damage the other partner or the relationship. In the case of a hotel belonging to a network or chain, such actions might include falsifying or suppressing monthly sales data. A study of over 400 individual hotels belonging to two hotel chains investigated the extent to which opportunism of individual hotels is limited by three governance mechanisms. Those mechanisms are (1) ownership by chain headquarters, (2) a hotel's investment in transaction-specific assets (e.g., reservation-system software), and (3) shared norms of relational exchange. Of the three, taken either singly or together, only the shared norms of relational exchange were at all effective in managing hotel opportunism. Hotel opportunism declined with higher degrees of relational exchange. Hotel opportunism was exacerbated, however, when ownership or investments in transaction-specific assets were emphasized as governance mechanisms.

Opportunismus in langfristigen Geschäftsbeziehungen

Abstract: Opportunistic behaviour of an exchange partner is widely recognised as a potential problem in buyer-supplier relationships. One party has an incentive to act opportunistically if there is an asymmetric relationship of dependence. According to transaction cost economics vertical integration is a possibility to face this problem. But some authors suggest that there are other ways to control the problem of opportunism, e.g. investments in the quality of personal relationships or offsetting investments. We describe these possibilities and the circumstances in which they may be superior. To prove our theory, we conducted an empirical study. The findings show that detailed contractual safeguards should be best when the supplier can observe the behaviour of the buyer, or in cases in which the buyer is of great importance in the future. Good relationship quality has an advantage if the buyer is acting in a high competitive environment.

Civic Culture and Economic Transition in Russia

Abstract: In this paper we try to describe the main feature of Russian civic culture that could influence the outcome of the reform, initiated in 1992, and discuss channels through which the influence was realized. We begin with consideration of paternalism and what we call “habitual deviationism”, ordinary and routine deviation from official rules and laws. Both features were inherited from the Soviet period. Paternalism and habitual deviationism determine a system of people’s attitudes towards the state, the law, the property, and the liberal values. It will be demonstrated that this system entails an adversarial (using a Stiglitz’s term) style of governance and the opportunism and corruptibility of the ruling elite. It is argued that “shock therapy” may be destructive under this cultural environment and result in strong initial distortions since fast liberalization and privatization release a huge volume of rent and strengthen incentives for rent seeking activity. It is further argued that a good reform strategy should take civic culture into account and not put forward overly ambitious tasks. One has to build a sequence of interim institutions which would be more congruent to the initial cultural and institutional environment, facilitate the adaptation of the people, and stimulate modernization of cultural norms to reach an effective market system with time.

Industrial Clusters: Complexes, Agglomeration And/Or Social Networks

Abstract: Disambiguates theories of industrial clusters by providing a framework of three ideal-typical forms of clustering: the classic model of pure agglomeration, the industrial-complex model, and the social network or club model. The first two of these models come from classical and neoclassical economic tradition. The third comes from sociology. An analytic definition of these models and a discussion of their implications are provided. The economic models are also contrasted with the sociological model. The analysis examines how the theories might be empirically tested using actual data from the London area, and discusses the significance of the distinction between these models for policymakers. The model of pure agglomeration arises from Marshall and Hoover. Marshall theorized that firms localize in a given geographic area due to the development of a local pool of specialized labor, the increased local provision of non-traded input specific to an industry, and the maximum flow of information and ideas. Hoover classifies the sources of agglomeration advantages into three groups: internal returns to scale, localization economies, and urbanization economies. Industrial complexes are characterized by sets of identifiable and stable relations among firms which are in part manifested in their spatial behavior. Traditionally, the focus of the analysis under this model is how location affects transaction costs. The social network model sees the creation of organizations is a rational response to the transaction cost problems caused by bounded rationality and opportunism in a pure market-contracting economy. Because such a system requires interpersonal trust, proximity has often be a prerequisite for the development of social networks. (CAR)