Institutions and Transition

Prepared for The New Palgrave Dictionary of Economics, 2nd Edition, this essay examines the evolution of both institutions and economists' thinking on institutions during transition.  Early in transition, institutions were virtually ignored in the majority of normative prescriptions, but were central in the evolutionary-institutional approach.  Later, after events influenced intellectual developments, institutions were at the center of analysis.  Growth is strongly related to institutional construction.  Transition countries built institutions speedily but with marked variation across countries.  Legal systems and independent governmental agencies were sources of institutional growth, while government bureaucracies and informal mechanisms detracted from institutional growth.  In China , reforms addressed problems that institutions usually do, but in unusual ways.

Institutions and Firms in Transition Economies
Prepared for the Handbook Of New Institutional Economics, this chapter focuses on how the NIE has been used to understand transition and how the experience of transition can help inform the NIE.  It first shows that the NIE, as an analytical tool, hardly played any role at all in early transition, but that strategies of transition might have been very different had they embodied the lessons of the NIE.  Institutional lacunae are now presumed to underlie the deep recessions in the first post-communist years.
Subsequently, however, institutional construction has been quick.  This chapter presents evidence on the speed of construction and on variations across different types of institutions.  It also examines the reactions of firms to the new institutions.  Firm adjustment is slower than institutional construction.  The contrast between law's use in transactions and problems in corporate governance suggests that complementarities between institutions are important and that new institutions cannot quickly negate the effects of past privatization policies.  These conclusions reverberate with the process of Chinese reforms, which relied on transitional institutions and which had characteristics that would seem familiar to a practitioner of the NIE.
The chapter concludes by emphasizing the lessons from transition for the NIE.  The destruction of even very poor institutions can be costly.  Institutional construction can proceed very quickly when there is consensus on change and the process of institutional development is supply driven.  At the same time, increases in national income can lag institutional development, if firms are slow to react, which will especially be the case if the new institutions are far removed from existing ones, as is likely when changes are supply driven.

The Relative Levels and the Character of Institutional Development in Transition Economies
Institutional quality in transition countries is roughly as expected given per capita incomes.  Institutions are improving continuously.  Given prevailing assumptions that the institutional situation is dismal, the developments giving rise to this surprising finding must be investigated more fully.  This investigation begins by cataloging the mechanisms that could have improved institutional indexes.  Then, evidence is examined on the relative strengths of each of these mechanisms.  Formal institutions have contributed more than informal ones.  The largest contributions have come from formal institutions separate from the state administrative structure.  Political institutions, legal systems, and independent governmental agencies have been important. 

Which mechanisms support the fulfillment of sales agreements? Asking decision-makers in firms
(co-authored with Kathryn Hendley)
A new methodology measures the importance of different mechanisms for supporting agreements.  Romanian company directors were surveyed on a full complement of mechanisms.  Bilateralism is preponderant and law used extensively, with third-parties less important.  These three are non-complementary.

Demand and Supply in Romanian Commercial Courts: Generating Information for Institutional Reform
Institutional reform is much emphasized in transition countries, but the process of constructing workable institutions is not well understood. One element of this process that has often been neglected is the generation of empirical information that can aid in the process of institutional design. This paper examines how such information can be produced for one vital area of reform in transition and developing economies, commercial court reform. The paper estimates a supply-demand model for commercial court services in Romania. The model’s construction suggests methodological problems in existing studies and the estimates quantify the possible biases, which would lead to erroneous conclusions on institutional design. The results show the simultaneous relation between congestion and caseload and the exogenous effects of resources, legal culture, options for appeal, and economic environment. Coincidentally, Romania recently implemented a reform for which the results have pertinence. The reform foreclosed options shown to be valuable to businesses. Perhaps some failures of institutional reform are due to lack of empirical input into institutional design. 

Law, Relationships, and Private Enforcement: Transactional Strategies of Russian Enterprises
(co-authored with Kathryn Hendley and Randi Ryterman)
We examine how Russian enterprises do business with one another, focusing on the strategies used to obtain efficiency and predictability in their transactions. Using survey data, the paper analyzes the relative importance of relational contracting, self-enforcement, enterprise networks, private security firms, administrative institutions, and courts. Enterprise-to-enterprise negotiations are preferred, but courts are used when disputes resist resolution through negotiation. Consistently, little evidence suggests enterprises resort to private enforcement, indicating overstatement in the supposed connection between weakness in law and the mafia's rise. Legacies of the old administrative enforcement mechanisms are few, although enterprise networks from Soviet days remain resilient.

Law Works in Russia: The Role of Legal Institutions in the Transactions of Russian Enterprises
(co-authored with Kathryn Hendley and Randi Ryterman)
We examine whether law and legal institutions add value to Russian transactions, using enterprise surveys. Enterprise officials view legal institutions relatively benignly. Direct contacts are most important in resolving transactional problems, but courts are used when negotiations fail. We show that potential for hold-up reduces the value of transactions, that the nature of enterprise ownership and control affects the ability to sustain relationships, and that legal factors affect success. The economic and institutional environment rewards enterprises that invest effort in constructing contracts, that possess superior legal knowledge, and that reorient their legal work to new opportunities.

Do "Repeat Players" Behave Differently in Russia? An Evaluation of Contractual and Litigation Behavior of Russian Enterprises
(co-authored with Kathryn Hendley and Randi Ryterman)
This paper was prepared for a conference held on the occasion of the 25th anniversary of the publication of Marc Galanter's "Why the ‘Haves’ Come Out Ahead: Speculations on the Limits of Legal Change." We examine whether the concept of a repeat player (RP), which Galanter introduced in this paper, helps in deciphering the law-related behavior of Russian enterprises. We adapt the RP concept to the Russian context defining the Russian repeat player (RRP). Using data from 328 enterprises, we examine whether RRP-ness explains the use of protokols of disagreement, petitioning to freeze assets, contractual pre-payment, and litigation activity. RRPs are very different from Galanter's RPs, generally exhibiting less aggression and innovativeness, but suing other RRPs frequently. Examination of factors other than RRP-ness suggests the presence of lawyers is important in determining law-related activity, a result not necessarily expected in Russia.

A Regional Analysis of Transactional Strategies of Russian Enterprises
(co-authored with Kathryn Hendley and Randi Ryterman)
The authors examine the regional variation in how Russian enterprises do business with one another, focusing on the strategies used to resolve conflict. The analysis is grounded in a survey of industrial enterprises in six Russian cities. The authors compare the use and the effectiveness of various strategies across regions, including relational contracting, self-enforcement, enterprise networks, private enforcers, administrative agencies, and courts. The differences are evaluated to determine whether regions emerge as a significant causal factor. While the data show variation, it is less than expected. With the exception of Moscow, which consistently stands out as unique, few patterns emerge.

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