beijing13 0831handout 最近の更新履歴 Hideshi Itoh

Policy Forum in Asia 2013

Interaction Between Formal and Relational Governance

Hideshi Itoh

Graduate School of Commerce and Management

Hitotsubashi University

August 31, 2013@Renmin University of China

Four Levels of Social Analysis . . . 2

Level 3: Institutions of Governance. . . 3

Contract Theory (in Economics) . . . 4

The Economic Motive for Contracts . . . 5

Endogenous Legal Enforcement (Not Today) . . . 7

Private Ordering (Focus of This Talk). . . 8

Self-Enforcing Condition . . . 11

Introduction to The Issue . . . 12

Illustration: Initial (Weak) Formal Institutions . . . 13

Illustration: Stronger Formal Institutions . . . 14

Illustration: Comparison . . . 15

Main Model of Seller-Buyer Relationships . . . 16

Main Result . . . 17

Threat-Point Effect Is Positive ∆ _z > 0. . . 18

Main Result . . . 19

Threat-Point Effect Is Negative ∆ z < 0 . . . 20

Empirical Evidence. . . 21

Summary . . . 22

References 23

Four Levels of Social Analysis

Williamson (2000): The New Institutional Economics: Taking Stock, Looking Ahead, Journal of Economic

Literature 38, 595–613

level name examples process

L1 Embeddedness customs, traditions,

spontaneous

norms, religion

L2 Institutional constitutions, laws, evolution

Environment property rights and design

L3 Governance contracts and reasoning

private ordering and design

L4 _Allocation ^{Resource prices and} _quantities continuous

Policy Forum in Asia August 31, 2013@RUC – 2 / 23

Level 3: Institutions of Governance

level name examples process

L2 Institutional constitutions, laws, evolution

Environment property rights and design

L3 Governance contracts and reasoning

private ordering and design

■ Level 2: Formal rules of the game

■ Level 3: Play of the game

◆ to mitigate conflict and realize mutual gains under constraints imposed on from level 2

◆ feedback from level 3 to level 2

Policy Forum in Asia August 31, 2013@RUC – 3 / 23

Contract Theory (in Economics)

■ Tool to analyze governance: contract theory

“the theory of incentives, information, and economic institutions, which is

generally referred to in short as contract theory ”

Bolton and Dewatripont (2005, p.2)

1. Opening the black box of the firm

2. Optimal incentives under asymmetric information

3. Incomplete contracts and firm boundaries

■ design a “contract”

→ the parties’ incentives to choose actions

Policy Forum in Asia August 31, 2013@RUC – 4 / 23

The Economic Motive for Contracts

■ Why write a contract?

“...the rationale for contracting is to lock in a commitment ex ante that one or both parties

would otherwise not wish to honor ex post.”

■ A key to successful commitment:

enforcement of contracts

“The use of a contract to establish such commitment is undermined,..., if the contract will

not be enforced in the way the parties anticipate.”

Hermalin et al. (2007, p.99)

Policy Forum in Asia August 31, 2013@RUC – 5 / 23

The Economic Motive for Contracts

■ “Economists have been generally most optimistic about courts as the institution...enforcing

contracts, ... and with few exceptions ... have devoted little attention to analyzing their

limitations”

Djankov et al. (2003, p.454)

◆ Verifiability of states/actions is exogenously given

◆ Contractual terms contingent on verifiable states/actions are perfectly enforced by courts

◆ Contractual terms contingent on unverifiable states/actions are never enforced by courts

Policy Forum in Asia August 31, 2013@RUC – 6 / 23

Endogenous Legal Enforcement (Not Today)

■ Reality#1: judicial enforcement depends on

◆ Contract law:

The courts fill gaps, interpret terms, supply default remedies, replace terms with the

courts’ terms, etc

◆ Parties’ ex post costly action

(e.g., submit evidence)

◆ Parties’ ex ante costly contracting

Policy Forum in Asia August 31, 2013@RUC – 7 / 23

Private Ordering (Focus of This Talk)

■ Reality#2: importance and prevalence of private/informal enforcement

◆ Obviously in developing/transition economies where legal protections are limited and

unreliable (Dixit, 2004; Johnson et al., 2002; McMillan and Woodruff, 1999) .

◆ True even in economies with well-developed legal systems (Djankov et al., 2003; Macaulay,

1963) :

“private ordering under the shadow of the law”

Policy Forum in Asia August 31, 2013@RUC – 8 / 23

Private Ordering (Focus of This Talk)

“Much of the contract management and dispute settlement action is deal with

directly by the parties—through private ordering.”

Williamson (2000, p.599)

“The upshot is that private ordering is central to the performance of an economy

whatever the conditions of lawfulness.”

Williamson (2005, p.2)

Policy Forum in Asia August 31, 2013@RUC – 9 / 23

Private Ordering (Focus of This Talk)

■ Private enforcement of “contracts”

◆ relational contracting: contract enforcement is carried out within a bilateral relationship

◆ community enforcement: the other parties in the market play disciplinary roles

■ Relational contracts

♥ terms contingent on states/actions unverifiable by the court but mutually observable

among the transaction parties may be enforced

♠ informal promises must be self-enforcing

Policy Forum in Asia August 31, 2013@RUC – 10 / 23

Self-Enforcing Condition

The Self-Enforcing Condition

✓ ✏

RT ≤ ^{≤ ≤} FL = ∆ × ^{× ×} (s − s)

✒ ✑

■ RT: reneging temptation

= maximum immediate (short-run) gain from deviating from informal promises

■ FL: future loss

= due to termination, no cooperation, etc.

◆ ∆: the long-term value of relationship

← patience (↑ ^↑ ↑), frequency (↑ ^↑ ↑), bad luck (↓ ^↓ ↓)

◆ s: total surplus under “good” relationship

◆ s: total surplus under alternatives

Policy Forum in Asia August 31, 2013@RUC – 11 / 23

Introduction to The Issue

The Self-Enforcing Condition

✓ ✏

RT ≤ ^≤ ≤ FL = ∆ × ^× × (s − s)

✒ ✑

(Baker et al., 1994; Schmidt and Schnitzer, 1995; Pearce and Stacchetti, 1998)

1. Complementarity effect of formal institution: RT ↓ ^↓ ↓

= deviation from informal promise becomes less tempting

→ Relational contracts are more likely to be self-enforcing

2. Substitution effect of formal institution: FL ↓ ^↓ ↓

■ ^← s (value of alternative transaction) ↑ ^{↑ ↑}

→ Relational contracts are less likely to be self-enforcing

Policy Forum in Asia August 31, 2013@RUC – 12 / 23

Illustration: Initial (Weak) Formal Institutions

r = 1/∆

s 11 s

s ₁₀

0 _ˆs

r = ^{s 11 − s}

d ₂

r = ^{s 11 − s}

d ₁ + d ₂

r = ^{s 11 − s 10}

d ₂

s ₁₁

d ₁ + d ₂

s ₁₁ − s ₁₀

d 2

Policy Forum in Asia August 31, 2013@RUC – 13 / 23

Illustration: Stronger Formal Institutions

r = 1/∆

s ₁₁ s

s ₁₀

0 _ˆs

r = ^{s 11 − s}

d 2

r = ^{s 11 − s}

d ₁ + d ₂

r = ^{s 11 − s 10}

d ₂

s ₁₁

d ₁ + d ₂

s ₁₁ − s ₁₀

d ₂

Policy Forum in Asia August 31, 2013@RUC – 14 / 23

Illustration: Comparison

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r = 1/∆

s 11 s

s ₁₀

0

(A)

(B)

ˆs

r = ^{s 11 − s}

d ₂

r = ^{s 11 − s}

d ₁ + d ₂

r = ^{s 11 − s 10}

d ₂

s ₁₁

d ₁ + d ₂

s ₁₁ − s ₁₀

d 2

Policy Forum in Asia August 31, 2013@RUC – 15 / 23

Main Model of Seller-Buyer Relationships

■ Itoh and Morita (2013)

analyze repeated seller-buyer relationship

action (investment) a = 0 a = 1

benefit 0 y > 0

cost 0 d > 0

total surplus 0 s ^∗ = y − d > 0

alternative value s 0 = z 0 s 1 = z 1 ⁻ d

Assume y > ∆ _z = z ₁ − z ₀ , s ^∗ > s ₁ , and s ^∗ > s ₀

Policy Forum in Asia August 31, 2013@RUC – 16 / 23

Main Result

■ Itoh and Morita (2013)

■ Case 1: ∆ z = z 1 ⁻ z 0 > 0

(the threat-point effect is positive)

Formal contract is of no value, and relying entirely on informal, relational contracts

(discretionary pay, termination) is better

■ Intuition: RT = d − ∆ z < d

◆ a ↑ ^↑ ↑ ⇒ alternative value ↑ ^↑ ↑

Utilize this “market incentive” rather than regulate via formal contracting

Policy Forum in Asia August 31, 2013@RUC – 17 / 23

Threat-Point Effect Is Positive ∆ z > 0

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r = 1/∆

s 0

s ^∗

0

(A) _{r =} ^{s ∗ − s 0}

d

s ^∗

d

r = ^s

∗ _{− s}

0

d − ∆ z

s ^∗

d − ∆ z

Policy Forum in Asia August 31, 2013@RUC – 18 / 23

Main Result

■ Itoh and Morita (2013)

■ Case 2: ∆ z = z 1 ⁻ z 0 < 0

(the threat-point effect is negative)

Use of relational contracting along with a formal fixed-price contract makes the

self-enforcing condition easier to satisfy

■ Formal contracts and relational contracts are complementary

■ Intuition: RT = d − ∆ z > d

◆ a ↑ ^↑ ↑ ⇒ alternative value ↓ ^↓ ↓

◆ A formal fixed-price contract eliminates the negative “market incentive”

■ Writing a more complex contract (than a fixed-price contract) does not pay

Policy Forum in Asia August 31, 2013@RUC – 19 / 23

Threat-Point Effect Is Negative ∆ z < 0

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r = 1/∆

s 0

s ^∗

0

(B)

r = ^s

∗ _{− s}

0

d

s ^∗

d

r = ^s

∗ _{− s}

0

d − ∆ z

s ^∗

d − ∆ z

Policy Forum in Asia August 31, 2013@RUC – 20 / 23

Empirical Evidence

■ Johnson et al. (2002) : trade credit in post-communist countries in Europe

■ Empirical results for court enforcement: trade credit is significantly more (8%) likely to be

granted to customers when the seller states confidence that courts can enforce contracts

(complementarity)

■ The effect of courts is significantly stronger in relationships where switching costs are low

(s high)

Policy Forum in Asia August 31, 2013@RUC – 21 / 23

Summary

1. Because of imperfect and costly court ordering, private ordering is central to the

performance of an economy whatever the conditions of lawfulness

2. Private enforcement of contracts is mainly relational in nature, and must satisfy the

self-enforcing condition

3. Formal institutions can complement informal, relational institutions by reducing Reneging

Temptation (left-hand side of the condition)

4. Formal institutions can have negative effects on relationships by reducing Future Loss

(right-hand side of the condition)

https://sites.google.com/site/hideshiitoh/files/beijing13-0831handout.pdf

Policy Forum in Asia August 31, 2013@RUC – 22 / 23

References 23 / 23

George Baker, Robert Gibbons, and Kevin J. Murphy. Subjective performance measures in optimal

incentive contracts. Quarterly Journal of Economics, 109(2):1125–1156, 1994.

Patrick Bolton and Mathias Dewatripont. Contract Theory. The MIT Press, Cambridge MA, 2005.

Avinash K. Dixit. Lawlessness and Economics: Alternative Modes of Governance. Princeton

University Press, Princeton NJ, 2004. (publisher’s site).

Simeon Djankov, Rafael La Porta, Florencio Lopez-De-Silanes, and Andrei Shleifer. Courts. Quar-

terly Journal of Economics, 118:453–517, 2003. (abstract).

Benjamin E. Hermalin, Avery W. Katz, and Richard Craswell. Contract law. In A. Mitchell

Polinsky and Steven Shavell, editors, Handbook of Law and Economics, volume 1. North-Holland,

Amsterdam, 2007. (URL).

Hideshi Itoh and Hodaka Morita. Formal contracts, relational contracts, and the threat-point effect.

May 2013.

Simon Johnson, John McMillan, and Christopher Woodruff. Courts and relational contracts. Journal

of Law, Economics, and Organization, 18:221–277, 2002. (abstract).

Stewart Macaulay. Non-contractual relations in business: A preliminary study. American Sociolog-

ical Review , 28:55–67, 1963. (URL).

John McMillan and Christopher Woodruff. Dispute prevention without courts in Vietnam. Journal

of Law, Economics, and Organization, 15:637–658, 1999. (abstract).

David G. Pearce and Ennio Stacchetti. The interaction of implicit and explicit contracts in repeated

agency. Games and Economic Behavior, 23:75–96, 1998.

Klaus M. Schmidt and Monika Schnitzer. The interaction of explicit and implicit contracts. Eco-

nomics Letters , 48:193–199, 1995.

Oliver E. Williamson. The new institutional economics: Taking stock, looking ahead. Journal of

Economic Literature , 38:595–613, 2000.

Oliver E. Williamson. The economics of governance. American Economic Review Papers and

Proceedings, 95:1–18, 2005. (URL).