Governance in the Wild: a Theory of State Vs. Private Firms Under Weak Institutions

Gani Aldashev (ECARES, ULB)
Giorgio Zanarone (Washington University in St. Louis)

Abstract : We study how weak constraints on the government affect private contracts and the ownership of firms. To discourage expropriation, a social contract must give the government a stake in firm output. However, this reduces the firm owners’ incentives to honor business contracts with suppliers, undermining their credibility. This tension disappears if suppliers contract directly with the government, which we interpret as a state-owned firm. Our model therefore predicts that under weak political institutions, contracting with the government may be second-best efficient if private business contracts are not verifiable, and hence require self-enforcement. We discuss evidence on privatizations in developing countries, and on the emergence of private firms in East Asia, which is consistent with our model’s predictions. Our model has broader implications for contracting in the shadow of power, including the effect of corporate governance on the design of intra-firm hierarchies.

Institutions, Trade and Growth: the Ancient Case of Proxenia

Pier Paolo Creanza (Princeton University)

Abstract : Recent scholarship contends that ancient Mediterranean economies were able to grow intensively. A common explanation is Smithian growth spurred by reductions in transaction costs and increased trade flows. This paper argues that an ancient Greek institution, proxenia, was among the innovations that allowed such growth in the period 500-0 BCE. Proxenia entailed a Greek city-state declaring an individual from a different city to be a 'public friend', a status that conferred both duties and privileges. Arguably, the functions performed by beneficiaries of proxenia facilitated economic transactions between communities. Text, network and regression analyses confirm the economic significance of proxenia and establish a strong relation between its institutional network and trade intensity. This provides indirect evidence supporting a secular process of market expansion and Smithian growth.