Sergei Guriev

Why Resource-Poor Dictators Allow Freer Media: A Theory and Evidence from Panel Data

Every dictator dislikes free media. Yet, many nondemocratic countries have partially free or almost free media. In this article, we develop a theory of media freedom in dictatorships and provide systematic statistical evidence in support of this theory. In our model, free media allow a dictator to provide incentives to bureaucrats and therefore to improve the quality of government. The importance of this benefit varies with the natural resource endowment. In resource-rich countries, bureaucratic incentives are less important for the dictator; hence, media freedom is less likely to emerge. Using panel data, we show that controlling for country fixed effects, media are less free in oil-rich economies, with the effect especially pronounced in nondemocratic regimes. These results are robust to model specification and the inclusion of various controls, including the level of economic development, democracy, country size, size of government, and others.

Smuggling Humans: A Theory of Debt-Financed Migration

We introduce financial constraints in a theoretical analysis of illegal immigration. Intermediaries finance the migration costs of wealth-constrained migrants, who enter temporary servitude contracts to pay back the debt. These debt/labor contracts are more easily enforceable in the illegal than in the legal sector of the host country. Hence, when moving from the illegal to the legal sector becomes more costly, for instance, because of stricter deportation policies, fewer immigrants default on debt. This reduces the risks for intermediaries, who are then more willing to finance illegal migration. Stricter deportation policies may thus increase rather than decrease the ex ante flow of illegal migrants. We also show that stricter deportation policies worsen the skill composition of immigrants. While stricter border controls decrease overall immigration, they may also result in an increase of debt-financed migration.

Patents vs. Trade Secrets: Knowledge Licensing and Spillover

We develop a model of two-stage cumulative research and development (RD yet the contracting parties choose the closed sale whenever the interim knowledge is more valuable and leakage is sufficiently high. If the extent of leakage is lower, more RUs choose open sales, generating a nonmonotonic relationship between the strength of intellectual property rights and aggregate R&D expenditures and the overall likelihood of development by either DU. (JEL: D23, O32, O34) (c) 2006 by the European Economic Association.

Incomplete Contracts with Cross-Investments

We study an incomplete contract model where both contracting parties can invest, and the investments have both self- and cross-effects. We analyze the performance of non-contingent contracts, message games, option contracts and property rights. We find that the first best is implemented if (i) the cross effects are negative or weaker than self-effects; (ii) the strength of cross-effects relative to self-effects is symmetric across parties. If either of these conditions is violated, even message contingent revelation mechanisms fail to provide efficient incentives. For this case, we obtain a number of results characterizing the second best. We find that property rights outperform contracts and partially relax the symmetry constraint. In either first best or second best, the stronger the cross-effects, the lower the value of contracting. The optimal allocation of property rights assigns ownership to the party with stronger cross-effects.

Microeconomic Aspects of Economic Growth in Eastern Europe and the Former Soviet Union, 1950-2000

The theme of this paper is the microeconomics of economic growth in Central and Eastern Europe (CEE) and the Newly Independent States (NIS) over the period 1950-2000. The key structural change in this region is the end of the socialist regime in 1989 and 1992, and the subsequent attempt at transition to a market economy. We begin the paper with an examination of the key legacies from the socialist period. We then examine the key microeconomic actors in transition economies: households, enterprises, and government officials. Although there are many common processes at work, differences in economic performance tend to coincide with the geographical divide. Legacies play an important part. We also argue that differences in openness also plays an important role in generating different outcomes. These factors, combined with defects in the political and legal system, have given rise to a vicious circle of resistance to reform in the NIS.

Cooperation in R&D: patenting, licensing and contracting

In this paper we review some of the literature on R&D collective arrangements using game theoretical concepts and considering various settings, involving either complete or incomplete contracts. Patent protection, licensing in various industry contexts as well as the role of various factors such as product differentiation, innovation magnitude and asymmetric information are considered. The relation of innovative activity to the intensity of competition is reconsidered and the benefit of various types of cooperative R&D-agreements in presence of externalities are reviewed. The last two sections are devoted to contracting issues.

Development Based on Commodity Revenues

Commodity resources offer significant opportunities for development. In the long run, however, the performance of commodity - rich countries tends to fall short of expectations, as commodity rents induce macroeconomic volatility and undermine incentives to improve institutions. The resource - rich countries have embraced a range of diversification strategies to avoid the “resource trap”, to varying degrees and with varying success. Improving institutions remains the key challenge.

On Microfoundations of the Dual Theory of Choice

We show that Yaaris dual theory of choice under risk may be derived as an indirect utility when a risk-neutral agent faces financial imperfections. We consider an agent that maximizes expected discounted cash flows under a bid-ask spread in the credit market. It turns out that the agent evaluates lotteries as if she were maximizing Yaaris dual utility function. We also generalize the dual theory of choice for unbounded lotteries.

Earnings Manipulation and Incentives in Firms

We show that earnings manipulation destroys incentives within the corporate hierarchy. In the model, top management has incentives to over-report earnings. An insider, for instance, a division manager may gain evidence about over-reporting. We show that the division manager is more likely to have evidence, when the performance of her own division is low. Top management wants to prevent information leakage to the outside world. Hence, when the division manager threatens to blow the whistle, top management pays her a bribe. As this occurs when division output is low, the wedge between payments in high and low states of nature decreases. Earnings manipulation therefore undermines incentives to exert effort and destroys value. We show that earnings manipulation is more likely to occur in flatter hierarchies; we also discuss implications of the auditing and whistle-blowing regulations of the Sarbanes-Oxley Act.

Duration and Term Structure of Trade Agreements

Why are some trade agreements concluded for a limited period of time while others have the form of evergreen contracts supplemented with an advance termination notice clause? We use a dynamic incomplete contracting model to demonstrate that the time structure of the trade agreement is related to the nature of the underlying trade-related investments (or other types of irreversible resource adjustments). If these investments are lumpy and specialized to trade in a particular homogeneous good, the agreements with the fixed term of duration are more likely. The fixed-term agreement provides incentives for the initial investment but leaves the parties the flexibility to revisit the need for future investment by resorting to renegotiation. If the agreement covers trade in goods or services requiring incremental investments with spillovers of the investment benefits across industries, there is a lower risk of overinvestment. Therefore, the parties are more likely to choose an evergreen agreement (with an advance termination notice or an escape clause). We show that these predictions are consistent with the econometric evidence on the trade agreements to which the U.S. is a party.