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Parallel Universes Presentation to EERC Workshop Kyiv, May 2016 John S Earle GMU School of Policy and Government Dashing from one thing to another, or linking them together, he heaped them up first because he had endless things in his head, and one thing led on to the next; but in particular because it was his passion to make comparisons and discover relations, display influences, lay bare the interwoven connections of culture. -- Thomas Mann, Doctor Faustus

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  • Parallel Universes

    Presentation to EERC Workshop

    Kyiv, May 2016

    John S Earle

    GMU School of Policy and Government

    Dashing from one thing to another, or linking them together, he

    heaped them up first because he had endless things in his head,

    and one thing led on to the next; but in particular because it was

    his passion to make comparisons and discover relations, display

    influences, lay bare the interwoven connections of culture.

    -- Thomas Mann, Doctor Faustus

  • Parallel Universes

    Two examples of EERC-inspired collaborations and research

    Wage arrears

    Klara Sabirianova Peter

    Reactions to Hartmut Lehmann, Mark Schaffer, Layard, etc.

    Productivity, reallocation, and misallocation

    David Brown

    Inspiration from Rick Ericson, others

    Reaction to Bartelsman-Haltiwanger-Scarpetta, Hsieh-Klenow, etc.

  • Todays Scripture(Deuteronomy 24: 14-15)

    You shall not withhold the wages of poor and needy laborers, whether other Israelites or aliens who reside in your land in one of your towns. You shall pay them their wages daily before sunset, because they are poor and their livelihood depends on them; otherwise they might cry to the Lord against you, and you would incur guilt.

  • Defining Institutions:Conventional Economic Approaches

    Organizations (e.g., unions)

    Policies (e.g., welfare system)

    Non-market constraints / Rules

    Institutions include any constraints devised to shape human interaction. Major role of institutions is to reduce uncertainty (North, 1990)

    Intentionality

    Functionalism

    Equilibrium strategy in a game (Aoki, 2005)

  • Elements of a Comparative Institutional Analysis

    Complementarities; feedback

    Path-dependence; history matters

    Increasing returns; network externalities

    Sunk costs; lock-in

    Endogenous enforcement

    Institutional independencies in multiple spheres (linked domains Aoki, 2005): labor, finance, suppliers, politics, culture

  • Related Sub-Fields of Economics

    Technology adoption and standards David 1985, Katz & Shapiro 1986, Arthur 1989

    Coordination failures Diamond 1982, Cooper & John 1988, Murphy et al

    1989, Azariadis & Drazen 1990)

    Social interactions peer effects (Evans et al. 1992, Sacerdote 2001)

    neighborhood effects (Katz et al 2001, Kling et al 2005)

    crime (Sah 1991, Glaeser 1996)

    labor supply (Woittiez & Kapteyn 1998, Weinberg et al 2004, Grodner & Kniesner 2006)

  • Social Interactions: Theory and Econometrics

    Models of Interactions

    Theory (Durlauf & Young 2001, Glaeser & Scheinkman 2004)

    Customs, conventions, conformity (Akerlof1980, Young 1993, Bernheim 1994)

    Strategic complementarities (Bulow et al. 1985, Milgrom & Roberts 1990)

    Econometrics: the reflection problem

    Manski 1993, Brock&Durlauf 2001, Moffitt 2001

  • Econometrics of Identifying/Measuring Institutions

    Sociology

    Organization-level; linear in lagged mean regression

    Economics: focus on identification problems

    Individual-level (social interactions)

    Reflection problem (Manski 1993)

    Experiments vs. policy interventions (IV)

    No estimates of feedback mechanisms

    Few of non-linear models or multiple equilibria

    Need case with special characteristics and data

    Especially interesting is a pernicious practice

  • A Case Study of an Institution

    Equilibrium outcome of a game (Aoki)

    Strategic complementarities

    Linked domains: economic, social, organizational, governance, legal, political, financial, cognitive, norms, discourse/rhetoric

    Multiple equilibria under some conditions

    Other factors: geography, macro (volatility), international

    Example from transition economy

    Microdata (linked employer-employee) for estimation

    Complementarities identified through policy intervention

    Measurement of 4 feedback loops that sustain equilibrium

    Estimates of 3 equilibria

  • Research on Wage Arrears

    How Late to Pay? Understanding Wage Arrears in Russia (with Klara Sabirianova), Journal of LaborEconomics, 2002.

    Complementarity and Custom in Wage Contract Violation (with Klara Sabirianova Peter). Review of Economics and Statistics, 2009.

    The Normalization of Deviant Organizational Practices: Wage Arrears in Russia, 1992-1999 (with Andrew Spicer and Klara Sabirianova Peter). Academy of Management Journal, April 2010.

  • Wage Contracts and Wage Arrears: Definitions

    Wage contract: employee works and employer pays an agreed wage at an agreed time

    Wage arrears: breach of contract where employer fails to pay in full and/or on time

  • The Puzzle of Wage Arrears (WA)

    In most economies, breaches of wage contracts are rare:

    fundamental economic institution, taken for granted exceptions: fraud, start-ups, bankruptcies

    But in some economies at some times WA are large.Russia:

    widespread (64% of workers at end-1998) large magnitude (average conditional stock = 4.8 months) persistent (since 1992) pervasive most sectors, ownership types, industries, regions,

    labor force groups affected although unevenly most prevalent not in small firms or start-ups, but in the large

    enterprise, formal sector social and political consequences WA frequently ranked as the

    No. 1 social problem in Russia, yet few large-scale protests

  • The Puzzle of Wage Arrears

    Not an intrinsic feature of transition

    Countries not affected (accumulated wage debt

  • Conventional Economic Accounts of Wage Arrears in Russia: Flexibility in response to distress

    Layard and Richter (1994): WA are a form of wage flexibility... explained by the willingness of workers to accept pay cuts in order to preserve jobs. Wage flexibility makes the Russian labor market every neoclassical economist's dream.

    OECD (1995) praises the remarkable flexibility...of real wages and the use of wage arrears...to finance this employment surplus.

    Similar but less sanguine: Clarke (1996), Gimpelson(1998, also redistributive), Lehmann et al. (1998)

    Alfandari and Schaffer (1996): Accounting fiction since managers could just lower the wage they actually pay

  • WA as part of the market?

    Desai and Idson (1998): WA enforce downward wage flexibility, explained by market considerations (negative W-WA rel)

    Boris Yeltsin: striking miners with WA have not yet learned to work in a market economy.

    They do not want to listen to any sober arguments or reasonable explanations. They want their problems settled immediately, which means at the expense of someone else. Who should the government take the money away from? Maybe from pensioners, students, doctors, teachers, and metallurgy workers? Do they need money less than miners?

  • An Alternative Approach: Understanding Wage Arrears as an Institution

    Special factors have raised incentives of employers to pay late and the tendency for employees to tolerate late payment

    Increasing returns to payment practices within (local) labor markets: strategic complementarities across employers

    social interactions across workers

    endogenous legal regime

    Possibility of multiple equilibria: WA equilibrium or contract violation equilibrium

    punctual payment or honored contract equilibrium

  • Empirical Observations to be Explained

    Large arrears even at firms showing strong growth and liquidity performance

    Persistence of substantial delays over time

    Large geographic variation in level of arrears

    Geographic variation in workers tolerance

  • Strategic Complementarities and Neighborhood Effects

    Responses to WA

    1. Workers quit

    2. Reduction in effort/hours (if you dont pay your servant his wages, he will pay himself Spanish proverb)

    3. Strikes/protests

    4. Legal penalties

    Firm using WA creates an externality for other firms considering a WA strategy:

    1. reduces attractiveness of quitting

    2. reduces negative effort response

    3. reduces strike threat

    4. reduces legal penalties (Of what use are laws empty of customs? Horace)

  • Strategic Complementarities and Neighborhood Effects

    Firm using WA creates an externality for other firms:1. reduces attractiveness of quitting in response to WA2. reduces negative effort response3. reduces strike threat4. reduces legal penalties (congestion, social norms)

    WA may be strategic complements

    The practice may have multiple equilibria

    When a critical mass of employers in a local area does not pay on time, it becomes optimal for most/all other employers in the region also not to pay. When a critical mass does pay, it is optimal to pay.

  • Formal Model => Possibility of multiple equilibria (symmetric Nash with identical players conditional on observables)

    1*=1*

    Unstable

    Equilibrium

    (2*)

    Late-Payment

    Equilibrium

    (3*)

    Punctual -

    Payment

    Equilibrium

    (1*)

    2*=2* 3*=3*

  • Equilibrium Selection

    What gave rise to the WA equilibrium in many parts of Russia?

    Some big player in the labor market?

    Our conjecture: the state set the standard

    Government attempts to balance the budget through sequestration

    Rule of law sacrificed to macro policy

  • Initial Evidence

    Firm survey (527 industrial employers, 196 farms)

    Comparison of average WA in declining and growing firms

    WA in top quartile of growing firms

    Probability of location in a high-WA region for firms with WA and without, declining and growing

  • Wage Arrears by Growth and Liquidity of Firms, 1998

    Growth and

    Liquidity Measures

    Definition of

    Expanding/Liquid

    Firms

    Mean Wage Arrears

    Declining

    Firms E(Wi|Gi0)

    t-test for

    difference E(Wi|Gi>0)

    E(Wi|Gi

    Gi+.75

    )

    Sales Positive sales

    growth

    2.696a

    (0.191)

    [314]

    2.528a

    (0.355)

    [96]

    0.423

    2.965a

    (1.022)

    [23]

    Output Positive output

    growth

    2.551a

    (0.180)

    [356]

    2.687a

    (0.319)

    [98]

    -0.357

    3.188a

    (0.819)

    [24]

    Real wages Increase in real

    wages

    2.526a

    (0.181)

    [308]

    2.897a

    (0.365)

    [116]

    -1.006

    3.231a

    (0.897)

    [26]

    Nominal wages Increase in nominal

    wages

    3.390a

    (0.316)

    [135]

    2.271a

    (0.188)

    [289]

    3.198a

    2.587a

    (0.501)

    [70]

    Employment Increase in

    employment

    3.063a

    (0.202)

    [321]

    1.716a

    (0.219)

    [146]

    4.032a

    1.649a

    (0.303)

    [37]

    Hiring rate Hiring rate above

    the median

    3.193a

    (0.271)

    [207]

    2.358a

    (0.213)

    [205]

    2.416b

    2.510a

    (0.287)

    [103]

    Profitability

    (profit/output)

    Positive profit 4.001a

    (0.286)

    [201]

    1.580a

    (0.145)

    [253]

    7.993a 1.591

    a

    (0.340)

    [64]

    Received patents

    (dummy)

    Received patents 2.191a

    [402]

    1.704a

    [72] 1.314 -

    Frozen bank account

    (dummy)

    Account not frozen 3.515a

    [349]

    0.812a

    [196] 9.765

    a -

    Barter in payments

    for inputs (dummy)

    No barter payments

    for inputs

    2.739a

    [348]

    2.538a

    [103] 0.554 -

    Barter in sales

    (dummy)

    No barter received

    for sales

    2.801a

    [379]

    2.300a

    [100] 1.369 -

    Overdue receivables

    (dummy)

    No overdue

    receivables

    3.236a

    [318]

    1.274a

    [105] 5.129

    a -

    Overdue payables

    (dummy)

    No overdue

    payables

    3.291a

    [320]

    1.050a

    [102] 5.840

    a -

  • Percentage of Firms in High Wage Arrear Regions by Growth and Liquidity of Firms, 1998

    Growth and Liquidity

    Measures

    Declining Firms (Gi < 0) Expanding Firms (Gi > 0)

    Wi = 0 Wi > 0 Wi = 0 Wi > 0

    Prob(i > med | Gi, Wi)

    Sales 41.7

    [120]

    72.2

    [194]

    28.6

    [35]

    68.9

    [61]

    Output 37.9

    [140]

    70.8

    [216]

    25.0

    [36]

    66.1

    [62]

    Real wages 36.1

    [119]

    67.2

    [189]

    29.6

    [44]

    75.0

    [72]

    Nominal wages 29.3

    [41]

    67.0

    [94]

    36.1

    [122]

    70.7

    [167]

    Employment 38.0

    [100]

    69.7

    [221]

    30.4

    [79]

    68.7

    [67]

    Hiring rate 34.3

    [73]

    71.6

    [134]

    39.2

    [79]

    65.9

    [126]

    Profitability (profit/output) 43.8

    [48]

    72.6

    [153]

    33.1

    [127]

    69.1

    [126]

    Received patents (dummy) 31.8

    [170]

    69.8

    [232]

    36.8

    [38]

    64.7

    [34]

    Frozen bank account

    (dummy)

    33.3

    [69]

    69.6

    [280]

    35.5

    [155]

    68.3

    [41]

    Barter in inputs (dummy) 37.2

    [121]

    67.8

    [227]

    29.3

    [41]

    75.8

    [62]

    Barter in sales (dummy) 39.8

    [128]

    68.1

    [251]

    22.2

    [45]

    72.7

    [55]

    Overdue receivables

    (dummy)

    38.0

    [92]

    69.9

    [226]

    34.8

    [69]

    69.4

    [36]

    Overdue payables (dummy) 39.4

    [94]

    69.5

    [226]

    30.9

    [68]

    70.6

    [34]

  • Estimated Reaction Functions of Wage Arrears

    0

    1

    2

    3

    4

    5

    6

    7

    8

    9

    10

    11

    12

    0 1 2 3 4 5 6 7 8 9 10 11 12

    Local wage arrears, months

    1994-2000

    1996-2000

  • Do WA remain on the menu? Regional patterns in 2009 vs. 2000

    0.1

    .2.3

    0 .1 .2 .3 .4 .5 .6 .7 .8 .99-year lag

    Fraction of employees with WA, 2009

  • Continuity in Patterns of WA

    0.1

    .2.3

    .4.5

    .6.7

    .8.9

    1

    0 1 2 3 4 5 6 711-year lag

    Unconditional number of owed months, 2009

  • Productivity, Reallocation, and Misallocation

    Reallocation is a basic issue in market economies Inherited misallocation => importance for transition Brown and Earle (every year since 2000) Misallocation and Productivity Dispersion: A Theoretical

    and Empirical Analysis (with Brown and Emin Dinlersoz, 2016)

    Any opinions and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information on individual firms is disclosed.

  • Productivity Dispersion

    Substantial TFP dispersion measured even within narrow industries: Dhrymes (1991)

    Bartelsman and Doms (2000)

    Dunne et al. (2004)

    Syverson (2004): 90-10 ratio ~ 2 for TFP, ~3 for LP

    Foster et al. (2008)

    Bartelsman et al. (2013)

    Is this inefficient?

    What prevents productivity equalization?

  • What prevents productivity equalization?

    One idea: static distortions = idiosyncratic taxes on output or inputs (Restuccia-Rogerson 2008; Hsieh-Klenow 2009) If static distortions are reduced, productivity

    dispersion falls and average productivity rises Conclusion: reforms/liberalization reduce dispersion Aggregate TFP gains from equalizing TFP within

    industries: China 2005: 87% India 1994: 128% U.S. 1997: 43% (but only 30.7% in 1987)

  • An Alternative Explanation

    Reallocation frictions sunk costs of entry fixed operating costs costs of investment with stochastic outcomes

    Models of industry dynamics Jovanovic (1982), Hopenhayn (1992), Ericson and Pakes

    (1995)

    Reducing frictions may not lower productivity dispersion

    Dispersion reflects experimentation and selection mechanisms

    Two types of experimentation: entry, restructuring

  • Model: Contrast with Hsieh-Klenow

    HK assume imperfectly elastic demand, and price is a fixed markup over marginal cost (inversely proportional to TFPQ)

    Firms with higher TFPQ produce a higher quantity, but charge a lower price

    Absent static distortions, TFPR is equalized across firms, and there is no TFPR dispersion

    Static distortions (idiosyncratic taxes) create dispersion

  • Sketch of Model

    Continuum of firms produce a homogeneous good

    Discrete time, multiple periods

    Firms take input and output prices

    Heterogeneous TFPQ, evolving independently for each firm

    Fixed cost of operating in industry

    Potential entrants have priors about on post-entry productivity. Pay entry cost, and initial TFPQ is revealed.

    Incumbent firms may invest/restructure to achieve potential improvements in TFPQ

  • Data

    U.S. Census of Manufactures (1963, 1967, 1972, 1977, 1982, 1987, 1992, 1997, 2002, and 2007)

    Official data on manufacturing firms in Eastern Europe Georgia (Statistical Dept.): 2000-2004, 2,645 firms

    Hungary (Tax Authority): 1986-2005, 50,069 firms

    Lithuania (Statistics Lithuania): 1995-2005, 8,037 firms

    Romania (Nat. Statistics Comm., Finance Min.): 1992-2006, 77,535 firms

    Russia (State Statistical Committee): 1985-2005, 41,029 firms

    Ukraine (State Statistical Committee): 1989, 1992-2006, 47,881 firms

  • Data

    U.S. Telecommunications Equipment analysis uses MFP including capital (perpetual inventory method, separately for structures and equipment), labor (total hours), energy, and other materials, using factor cost shares method, and LP (value added per hour worked)

    Analysis including Eastern European firms uses MFP calculated as residual from Cobb-Douglas production function with capital stock and number of workers, estimated separately for 19 NACE 2-digit sectors

  • Evolution of MFP Dispersion in the U.S. Telecommunications Equipment Sector

    0

    0.1

    0.2

    0.3

    0.4

    0.5

    0.6

    0.7

    1972 1977 1982 1987 1992 1997

    Log

    MFP

    Sta

    ndar

    d De

    viat

    ion

    Telecom Equip. All Manufacturing

  • Evolution of LP Dispersion in the U.S. Telecommunications Equipment Sector

    0

    0.2

    0.4

    0.6

    0.8

    1

    1.2

    1963 1967 1972 1977 1982 1987 1992 1997

    LP S

    tand

    ard

    Devi

    atio

    n

    Telecom Equip. All Manufacturing

  • MFP Distribution in the U.S. Telecommunications Equipment Sector

  • Effects of Entry, Exit, and Continuers on 5-Year MFP Standard Deviation Change in the U.S. Telecommunications Equipment Sector

    -0.1

    -0.08

    -0.06

    -0.04

    -0.02

    0

    0.02

    0.04

    0.06

    0.08

    0.1

    0.12

    1977 1982 1987 1992 1997

    Diffe

    renc

    e in

    MFP

    Sta

    ndar

    d De

    viat

    ion

    Entry Effect Exit Effect Continuer Effect

  • EBRD Market Institution Index

    1

    1.5

    2

    2.5

    3

    3.5

    4

    1985

    1986

    1987

    1988

    1989

    1990

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    EBRD

    Mar

    ket I

    nstit

    utio

    ns In

    dex

    Georgia

    Hungary

    Lithuania

    Romania

    Russia

    Ukraine

  • Evolution of Productivity Dispersion with Market Liberalization

    0

    0.2

    0.4

    0.6

    0.8

    1

    1.2

    1.4

    1.6

    1.8

    Sta

    nd

    ard

    De

    via

    tio

    n o

    f M

    FP

    Georgia

    Hungary

    Lithuania

    Romania

    Russia

    Ukraine

    U.S.

  • Productivity Distribution Prior to Transition to Market Economy

  • Productivity Distribution During Transition to Market Economy

  • New Entrant Productivity Distribution

    0

    5

    10

    15

    20

    25

    1.5

    Perc

    enta

    ge o

    f Age

    1 F

    irm

    s

    MFP Range

    Georgia 2001-04

    Hungary 1993-2003

    Lithuania 1996-2005

    Romania 1993-2006

    Russia 1993-2005

    Ukraine 1993-2006

    U.S. 1977-2007

  • Productivity and Exit Rates

    0

    5

    10

    15

    20

    25

    30

    1.5

    Pro

    po

    rtio

    n E

    xiti

    ng

    MFP Range

    Georgia 2001-04

    Hungary 1987-1989

    Hungary 1993-2003

    Lithuania 1996-2005

    Romania 1993-2006

    Russia 1993-2005

    Ukraine 1993-2006

    U.S. 1977-2007

  • Conclusion

    HKs TFP Gains from Equalizing TFPR in the

    US: 36% in 1977, 31% in 1987, 43% in 1997

    Notice the fluctuation across periods, plus:

    Output rose only 15% 1977-87 but 40% 1987-97

    No simple relationship between policies,

    institutional quality, and productivity dispersion

    Experimentation dominates selection

  • Conclusions (1/3)

    Interactions-based models always face identification problems This research provides:

    Explicit analyses of four feedback loops Valid IVs from exogenous decisions in the public sector Nonlinear estimates of reaction function, multiple equilibria

    Many studies discuss the importance of reliable contracting for economic development but little research on factors sustaining or undermining contracts This research provides:

    Analysis of mechanisms that may lead to breakdown of contract enforcement, sustainability of the bad equilibrium

    Demonstration of government role in contract enforcement

  • Conclusions (2/3)

    Wage payment practices as institutions

    Strategic complementarities in firm behavior

    Neighborhood effects in worker behavior

    Linked domains (Aoki): labor, social, organizational, governance, legal, political, financial, cognitive, norms, discourse/rhetoric

    Multiple equilibria parallel universes

  • Conclusions (3/3)

    Wage payment practices as institutions Strategic complementarities in firm behavior Neighborhood effects in worker behavior Linked domains (Aoki): labor, social, organizational, governance, legal,

    political, financial, cognitive, norms, discourse/rhetoric Multiple equilibria parallel universes

    Sociological approach adds value, also more parsimonious?

    (Il-)legal practices as institutions Everybody does it: accounting fraud, child labor, discrimination,

    corruption Endogenous enforcement Of what use are laws empty of customs? Horace

    "Everything in life is unusual until you get accustomed to it.- The Scarecrow in The Marvelous Land of Oz (L. Frank Baum)

  • Magnitude of Wage Arrears, Firm Data

    1991 1992 1993 1994 1995 1996 1997 1998

    E(t) 0.073 0.140 0.272 0.552 0.992 1.585 2.239 2.313

    E(t t > 0) 1.463 1.970 2.604 2.814 2.833 3.297 3.612 3.817

    Unconditional Distribution (t)

    t = 0 0.950 0.932 0.899 0.804 0.650 0.519 0.380 0.394

    1 month 0.034 0.028 0.022 0.058 0.075 0.065 0.094 0.101

    2-3 months 0.013 0.028 0.049 0.098 0.198 0.273 0.311 0.263

    4-6 months 0.003 0.012 0.028 0.028 0.057 0.110 0.140 0.154

    >6 months 0.000 0.000 0.003 0.012 0.021 0.033 0.074 0.089

    N 321 323 325 326 334 337 350 358

  • Table 2: Characteristics of the Worker Sample

    Variable Mean Variable MeanMale 0.473 Hourly Wage Rate (rubles) 12.094Schooling (years) 11.851 (20.033)

    (2.524) Family Income (thous.rubles) 0.961Age (years) 39.024 (1.775)

    (11.800) IndustryTenure (years) 8.180 Mining 0.023

    (9.068) Machine Building 0.109Employee Owns Light and Food 0.049

    No shares 0.813 Other Manufacturing 0.102

  • Table 3: Characteristics of the Firm Sample

    Variable Mean Variable Meant (number of monthly 1.175 Industry

    wages overdue) (2.375) Energy & Fuel 0.088

    t (local arrears) 1.146 Metallurgy & Chemicals 0.081

    (1.321) Machine Building 0.318

    Strikes (dummy) 0.019 Wood & Building Materials 0.105

    Quit Rate 0.169 Light 0.089

    (quits/employment) (0.169) Food 0.135

    Legal Penalties (dummy) 0.010 Other 0.060

    Union Density (% members) Agriculture 0.123

    0-9% 0.086 Type of Location

    10-59% 0.095 Moscow and St. Petersburg 0.105

    60-79% 0.088 Regional Capital City 0.360

    80-89% 0.087 Other City 0.342

    90-99% 0.275 Non-City 0.194

    100% 0.369 Legal Environment

    Firm Fringe Benefits Fraction of cases when 0.098

    Training 0.647 managers failed to pay (0.085)

    Kindergartens 0.433 assessed fines on time

    Housing 0.382 Fraction of cases when 0.216

    Training Costs 82.022 arrears were paid off after (0.158)

    (days) /100 (92.850) violation was discovered

  • Previous Empirical Work on Wage

    Arrears in Russia

    Most studies have examined data on workers: Desai and Idson (1998) Earle and Sabirianova (1998) Gimpelson (1998) Lehmann, Wadsworth, and Acquisti (1999)

    Case studies of firms: Gimpelson and Lippoldt (1996) Clarke (1998)

    Small sample survey of firms (July 1994): Alfandari and Schaffer (1996)

    Aggregate time-series analysis: Ivanova and Wyplosz (1998)

  • Testing Model Assumptions Wage Exogeneity

    Wage arrears are not identical with a reduction in the contractual wage Uncertainty about timing, extent of eventual payment

    Deferral of compensation => bonding effect

    Workers respond differently to wage arrears and wage cut

    Wage arrears perceived by people as different from a wage cut more important social issue, according to opinion polls; perceived as legal violation

    Violation of contract, not renegotiation

  • Estimating a Nonlinear Model of Wage Arrears Interactions

    Under the assumption r=eZ, the three symmetric Nash equilibria are

    The punctual payment equilibrium

    The threshold equilibrium

    The late payment equilibrium

    0*1

    d

    abdcc

    2

    )2(42*2

    d

    abdcc

    2

    )2(42*

    3

  • Testing Model Assumptions Response of Public Firms to the Local Wage Arrear Environment

    Wage arrear function in the public sector

    pjt is the number of unpaid monthly wages of individual pworking in the public sector in district j in period t

    jt is the level of wage arrears in the rest of the firms local labor market (district) j in period t

    Zijt is a vector of observable characteristics Gender, age, schooling, tenure, hourly wage rate, family

    income, and occupation

    Alternative specifications OLS with district, firm and individual fixed effects

    Testable implications is zero or significantly smaller than in the non-public sector

    pjttDjpjtZjtpjt z 0

  • Table 8: Testing Model Assumptions Linear Reaction Function, Public Sector

    OLS District FE Firm FEWorker

    FEPanel At (local arrears) 0.404*** 0.298*** 0.404*** 0.469***

    (0.061) (0.076) (0.054) (0.057)Male 0.080 0.071 0.008

    (0.081) (0.081) (0.134)Schooling (years) 0.007 0.015 -0.000 -0.029

    (0.017) (0.016) (0.025) (0.040)Age (years) -0.006 -0.006 0.002

    (0.004) (0.004) (0.006)Tenure (years) 0.027*** 0.027*** 0.010* 0.006

    (0.006) (0.006) (0.006) (0.008)Hourly Wage Rate (rubles) -0.006*** -0.006** -0.007*** -0.008***

    (0.002) (0.002) (0.003) (0.003)Family Income -0.024* -0.017 -0.038* -0.039*(thous.rubles) (0.013) (0.014) (0.022) (0.024)R2 overall 0.136 0.150 0.125 0.120Panel Bnt (local arrears in the non- 0.305*** 0.270*** 0.286*** 0.353***public sector) (0.046) (0.085) (0.043) (0.047)R2 overall 0.132 0.151 0.121 0.092

  • Searching for New InstrumentsThe Neighborhood Effect in the Defense Industry and Social Security Payments

    OLS No FE District FE Firm FE Worker FE

    Non-Public Sector 0.894*** 1.008*** 0.975*** 0.839***

    (N=12306) (0.088) (0.013) (0.055) (0.051)

    Public Sector 0.404*** 0.298*** 0.404*** 0.469***

    (N=7010) (0.061) (0.076) (0.054) (0.057)

    Defense Industry 0.152 0.002 -0.151 -0.184

    (N=1134) (0.104) (0.177) (0.170) (0.180)

    Retirement Benefits 0.170*** 0.413*** 0.379***

    (N=5756) (0.054) (0.099) (0.024)

  • Related Research (2/2)

    Institutions equilibrium strategies in a game (Aoki 2001, 2005)

    Contract enforcement institutional foundation of successful economies (North 1990, Hadfield

    2004) medieval history (Greif, Milgrom, Weingast 1994) transition (Murrell 1992, Greif & Kandel 1995)

    Russian wage arrears flexible wage adjustment (Layard & Richter 1995: the neoclassical

    economists dream labor market) empirical regularities with firm data (Alfandari & Schaffer 1996) empirical regularities with household data (Gimpelson 1998, Lehmann et

    al. 1999, Desai & Idson 2000) within/between firm variation, successful firms with arrears (Earle &

    Sabirianova 2002)

  • New Institutionalism in Sociology critique of economics

    Analysis level

    economists view institutions as epiphenomenal, the mere sum of individual-level properties

    neglect of social context and the durability of social institutions (Powell & DiMaggio)

    Rejection of intentionality

    Institutions include any constraint devised to shape human interaction. North, 1990

    Rejection of functionalism

    Reject inattention to cultural/historical context

  • New Institutionalism in Sociology

    Higher level of analysis. Durkheim social facts

    Spontaneous order

    Focus on thoughts of actors (beliefs)

    Concepts of legitimacy, norms (perceived)

    Distinguish institutions from mere conventions, take on a rule-like status

    Difference b/w formal law and social meaning

    Emphasis on cultural/historical context)

    Reference group: field, habitus (Bourdieu)

  • New Institutionalism in Sociology cognitive issues

    Unreflective, routine, taken-for-granted behavior

    Institutions reproduced because individuals unable to even conceive of appropriate alternatives

    Institutions do not just constrain options; they establish the very criteria by which people discover their preferences some of the most important sunk costs are cognitive. (P&D, p. 11)

    Mental models (Ashforth and Anand, 2003)

    Scripts, rituals

    Rhetoric, discourse, ideology

    Menu of choices defined socially

  • Possible Factors Raising the Incentives of Managers to Use Wage Arrears

    Financial distress and illiquidity extreme form: no 'live' money costliness of other methods of adjustments (layoff restrictions) uncertainty about demand conditions separations lower than under layoffs or wage cuts may be a low cost way of preserving employment

    Political economy avoid taxes (signal of inability to pay) extract subsidies (particularly for large employers)

    Poor monitoring of managerial actions asset stripping, cash flow diversion GKO (treasury bill) investment crowding out

    Employee ownership arising from privatization workers extend credit as well as equity to their employers managers try to force workers to sell their shares

  • Possible Factors Raising the Incentives of Workers to Tolerate Wage Arrears

    Little bargaining power and poor outside options (in some local labor markets) - Lehmann et al. (1998)

    Large quasi-rents (high mobility costs and firm-specific human capital)

    WA tilts wage-tenure profile, so the labor supply response is uncertain; could even reduce quits and raise hours and effort

    Costliness to workers of enforcing wage contracts

    Value of job includes fringe benefits, use of company facilities, theft, etc. (Layard and Richter, 1995)

  • Measurement of Wage Arrears

    Firm accounting practice cumulative monthly wage bills (payrolls) the firm owes to its

    workers, without regard to the timing of the overdue payments

    The survey question number of overdue monthly salaries

    Both concern the stock, measured in overdue monthly payments

    Wage volatility/measurement issues

    Implication: wage mismeasured in most studies of Russian labor markets in the 1990s

  • Data on Russian Employees, Employers, and Wage Arrears

    Russian Longitudinal Monitoring Survey (RLMS) Probability sample of households covering 50 districts (counties) Panel data, annual 1994-96, 1998, 2000; 10,000 observations each year Information on labor force activities, wage arrears Missing industry, other firm characteristics

    Improvements to RLMS Employer identified (1994-2000) Firm characteristics identified/cleaned, industry coded Interfirm mobility, firm tenure precisely measured Added questions

    Survey of employers of RLMS employee-respondents National probability sample of firms Detailed information on firm ownership, performance, arrears, etc. Strikes, legal penalties for wage arrears, separations

    Result: linked employer-employee data based on a probability sample for all of Russia

  • Adding Sociology

    Giddens (1984): control of diffuse anxiety is the most generalized motivational origin of human conduct => stick to routine

    Understanding deviance

    Taken-for-grantedness in a normative sense

    everybody does it

    speeding, illegal downloads, options backdating, discrimination, avoiding nanny taxes, hiring aliens

    Twain: Everybody complains about the weather but nobody ever does anything about it.

  • Other gaps in the economic approach to institutions

    Roles of rhetoric and discourse

    Difference between formal law and social meaning

    March and Olsen (1989): Practices are routinely chosen or ignored on the basis of taken-for-granted norms of behavior. What is taken for granted need not conform with formal laws and regulations.

    Whats on the menu?