Working Papers
Academic Year 2007-2008

Symposium: China Summer Institute

CIG Working Paper No. 76
Yanhui Wu, London School of Economics
Does Decentralization Improve Individual Performance? Not really for Journalists

CIG Working Paper No. 77
Xiaohan Zhong, Tsinghua University
More Production is Safer Production? Effects of Shutdown Policy on China’s Coal Industry

CIG Working Paper No. 78
YongXiang Wang, Columbia University
Profiting from Government Stakes in a Command Economy: Evidence from Chinese Asset Sales

CIG Working Paper No. 79
Hongbin Li, School of Economics and Management, Tsinghua University
Lingsheng Meng, Department of Economics, University of Maryland
Evaluating China’s Poverty Alleviation Program: A Regression Discontinuity Approach

CIG Working Paper No. 80
Julan Dua, Chinese University of Hong Kong
Yi Lub, University of Hong Kong
Zhigang Tao, University of Hong Kong
Property Rights Protection and Firm Horizontal Scope

CIG Working Paper No. 81
Filip Abraham, Jozef Konings and Veerle Slootmaekers
Catholic University of Leuven
FDI Spillovers in the Chinese Manufacturing Sector: Evidence of Firm Heterogeneity

CIG Working Paper No. 82
Robert Koopman, United States International Trade Commission
Zhi Wang, United States International Trade Commission
Shang-Jin Wei, Columbia University, CEPR, and NBER
How much of Chinese exports is really made in China? Assessing domestic value-added when processing trade is pervasive

CIG Working Paper No. 83
Elaine Liu, Princeton University
Time to Change What to Sow: Risk Preferences and Technology Adoption Decisions of Cotton Farmers in China

CIG Working Paper No. 84
Shing-Yi Wang, Yale University
Credit Constraints, Job Mobility and Entrepreneurship:
Evidence from a Property Reform in China

CIG Working Paper No. 85
Avram Ebenstein, Harvard University
Estimating a Dynamic Model of Sex Selection in China

CIG Working Paper No. 86
Loren Brandt, Aloysius Siow, Hui Wang, Toronto University
Substitution Effects in Parental Investments

CIG Working Paper No. 87
Douglas Almond, Columbia University and NBER
Lena Edlund, Columbia University
Hongbin Li, Tsinghua University
Junsen Zhang, Chinese University of Hong Kong
Long-term Effects of Early-life Development: Evidence From the 1959-1961 China Famine

Workshop on Endogenous Institutions and Political Conflict 2008

CIG Working Paper No. 70
Andrea Vindigni, Daron Acemoglu and Davide Ticchi
A Theory of Military Dictatorships

CIG Working Paper No. 71
Gerard Padro i Miquel, Sylvain Chassang
Conflict and Deterrence under Strategic Risk

CIG Working Paper No. 72
Carles Boix and Milan Svolik
The Foundations of Limited Authoritarian Government: Institutions and Power-sharing in Dictatorships

CIG Working Paper No. 73
Timothy Besley and Masayuki Kudamatsu
Making Autocracy Work

CIG Working Paper No. 74
Daron Acemoglu, Georgy Egorov and Konstantin Sonin
Dynamics and Stability of Constitutions, Coalitions,
and Clubs

CIG Working Paper No. 75
Luz Marina Arias
A Theory of the Origins of Coercive Enforcement by the
State: Insights from Colonial Mexico

California-EU Regulatory Cooperation Project Workshop

CIG Working Paper No. 59
Peter Berck and Runar Brannlund
De-Carbonizing California and the EU

CIG Working Paper No. 60
Ann E. Carlson
California Motor Vehicle Standards and Federalism: Lessons for the European Union

CIG Working Paper No. 61
Ian Cark
Identification of lessons learned and suggestions for the development of regulatory cooperation

CIG Working Paper No. 62
Daniel Farber
Constitutional Restrictions on Regulation by American States Democracy

CIG Working Paper No. 63
Larry Karp and Jinhua Zhao
EU-California Environmental Agreements: the role of trade in emissions permits and escape clauses

CIG Working Paper No. 64
Michael Kirschner
Manufacturing industry challenges and responses to EU and California product-targeted environmental regulations

CIG Working Paper No. 65
Gal Hochman, Gordon Rausser, Steve Sexton and David Zilberman
Agricultural Biotechnology in California and the EU

CIG Working Paper No. 66
Mark Schapiro
Regulatory Politics and Policies in the United States and Europe: Why the Difference?
EXCERPT: Chapter 1 from "EXPOSED: The Toxic Chemistry of Everyday Products and What's at Stake for American Power" (Chelsea Green, 2007)

CIG Working Paper No. 67
Margaret Taylor and Javiera Barandiaran
Muddling Through on the Cutting-Edge: How California and the European Union are Coping with the Risks of Nanotechnology

CIG Working Paper No. 68
David Vogel
The Hare and the Tortoise Revisited: The New Politics of Consumer and Environmental Regulation in Europe

CIG Working Paper No. 69
Michael P. Wilson and Megan R. Schwarzman
California Chemicals Policy and the European Union

Pesticide Regulation in the EU and California, (74kb .doc file)
CIG Working Paper No. 58
Chris Ansell, UC Berkeley
February 20, 2008

In 1962, Rachel Carson wrote Silent Spring about the hazards of the pesticide DDT and thereby helped to launch the modern environmental movement in the U.S. Since then, the use of pesticides has remained an important and contested environmental issue, though its early prominence has perhaps waned as the public has become conscious of scores of other environmental issues -- endangered species, climate change, air pollution, wilderness, etc. A preliminary analysis of three California newspapers (San Francisco Chronicle, LA Times, and the Sacramento Bee) suggests that coverage of the pesticide issue has slightly declined over the last twenty years. Nevertheless, pesticides remain intriguing because they represent such a multi-faceted regulatory issue. Pesticides are a food safety issue and debates about "residual" levels of pesticides in our food remain an important topic of concern. But pesticide contamination is also air and water-borne and thus closely connected to debates about air and water pollution. Pesticides also represent a serious occupational hazard for agricultural workers. This paper will examine pesticide regulation in the EU and California (and secondarily, in the U.S.) to evaluate whether regulatory cooperation between them is likely or possible.

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De-Carbonizing California and the EU (134kb .doc file)
CIG Working Paper No. 59
Peter Berck, UC Berkeley
Runar Brannlund, Umea University
February 20, 2008

Through legislation and executive order California has committed itself to a policy of reducing its greenhouse gas emissions. This paper will examine the transport sector part of these policies and their economic impact and contrast them to similar policies prevalent or proposed for the EU. The paper begins with a review of existing legislation and how this legislation fits within the US federal system. There is a potentially very different legal framework for the control of automobiles and other greenhouse gas sources. The federal issues have been the subject of important Supreme Court and District Court decisions and there is still live controversy as to the ability of California to regulate by itself. While the CA regulations are being litigated, the Senate has passed automobile regulation as stringent as California and the EU is considering very similar legislation. The efficacy of CA regulation depends upon the number of other states that adopt, as all states are linked together in the CAFE standards. Similarly, the cost of compliance depends upon the adoption by other states, by Canada, and by the EU.

Next we review the issues of carbon intensity of fuel. Here there are again both federal and state initiatives. Lastly we analyze the alternative fuels and existing fuels based upon the marginal, as opposed to average carbon content of the fuels. Trade in fuel is a very important part of the carbon accounting and it is very difficult for the importer (CA or the EU) to ascertain the provenance on the fuel it buys. Hence oil from shale and sand or ethanol made with coal energy can easily undo the supposed carbon gains from changing fuel mixes.

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California Motor Vehicle Standards and Federalism: Lessons for the European Union (220kb .doc file)
CIG Working Paper No. 60
Ann E. Carlson, UCLA
February 20, 2008

One of California's most important environmental contributions over the past four decades has been in developing increasingly stringent motor vehicle emissions standards. Most recently, the state has used special authority it is granted by the federal Clean Air Act to regulate greenhouse gas emissions from automobiles, though that authority is under significant legal attack both by the federal government and by auto manufacturers. The standard view of California 's regulatory leadership in this area is that it has exercised its leadership largely independent from the federal government. Federal law is most obviously important to California in explicitly authorizing the state to issue mobile source standards different from the federal standards while preempting all other 49 states from regulating in this area. Federal law has helped create California as an environmental leader despite conventional wisdom to the contrary. Finally, in providing California with superregulator status, the federal government has created a state laboratory for regulatory experimentalism that it has borrowed from regularly in adopting its own standards. If the EU and its regulators wish to emulate or borrow from the regulatory structure that has produced California 's emissions standards, this article will help advance their understanding by setting forth the complex legal and political underpinnings of California's system.

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Constitutional Restrictions on Regulation by American States Democracy (134kb .doc file)
CIG Working Paper No. 61
Daniel Farber, UC Berkeley
February 20, 2008

American states are subject to three constitutional restrictions that are relevant to environmental regulation. The first is called the dormant commerce clause doctrine. It prohibits states from engaging in regulation that discriminates against interstate or foreign commerce or that unduly burdens such commerce. This doctrine is analogous to EU mandates governing the free movement of goods, but has distinctive rules. The second is statutory preemption. Under the Supremacy Clause of the U.S. Constitution, a state law that conflicts with a federal statute is invalid. Preemption doctrine also invalidates state laws that interfere with the goals of federal statutes less directly. There is no equivalent of the subsidiarity concept in U.S. constitutional law. The third constitutional restriction is especially pertinent to EU-California cooperation. Under the doctrine of foreign policy preemption, a state law is invalid if it invades the exclusive control of the national government over foreign policy. Unlike EU member-states, American states do not retain the power to engage in their own foreign policy. The Supreme Court has issued two recent opinions on this subject, which are generally regarded as unclear in their exact meaning but as significantly expanding this doctrine. This paper will describe the constitutional doctrines and discuss how cooperative agreements can be designed to avoid constitutional problems.

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Identification of lessons learned and suggestions for the development of Regulatory Cooperation between California and the European Union (130kb .doc file)
CIG Working Paper No. 62
Ian Clark, European Commission
June, 2008

Between January and May 2008 I spent five months as a Visiting Scholar at the Institute of Governmental Studies at UC Berkeley working on this research project. In this paper I am summarizing my comments on the project so far and making a number of suggestions on areas where I believe cooperation in policy making and perhaps further research could be focused.

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EU-California Environmental Agreements: the role of trade in emissions permits and escape clauses (131kb .pdf file)
CIG Working Paper No. 63
Larry Karp, UC Berkeley
Jinhua Zhao, Iowa State University
February 20, 2008

Game theory helps to explain the relation between the structure of multi-national or multi-regional environmental agreements and the success of those agreements. Trade in emissions permits has ambiguous and in some cases surprising effects on both the equilibrium level of abatement, and on the ability to persuade nations or regions to participate in environmental agreements. An escape clause can promote the success of such an agreement, by reducing risk, easing enforcement problems, and most significantly, by providing leverage that encourages participation in the agreement.

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Manufacturing industry challenges and responses to EU and California product-targeted environmental regulations (153kb .doc file)
CIG Working Paper No. 64
Michael Kirschner, President and Managing Partner, Design Chain Associates February 20, 2008

Manufacturers worldwide find themselves dealing with a brand new strain of regulation targeting the environmental performance of their products. While able to (often barely) comply with these regulations, they are experiencing extraordinary difficulties doing it in an efficient and effective manner so costs are extremely high and the results are not nearly as dramatic as hoped for by the regulators. A key challenge is that, having never before dealt with these sorts of issues, the intellectual and informational framework necessary to support it is nonexistent. Universities, standards organizations, industries, and governments - even those doing the regulating - do not have as complete an understanding of the true requirements and impacts of this new regulatory paradigm. This paper will describe the regulations, how they target products, how governments, manufacturers, and standards organizations have approached these issues and why, the problems with these approaches, and ultimately propose that the solution to the problem may lie in concerted communication between the stakeholders. To this end, the paper proposes the creation and funding of a global public/private partnership focused on pre-competitive identification of industry needs, mechanisms to ensure industry has a better understanding of the context of environmental regulations, and all stakeholders have the ability to cross-fertilize and develop approaches to common solutions.

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Agricultural Biotechnology in California and the EU (294kb .doc file)
CIG Working Paper No. 65
Gal Hochman, Visiting Professor, UC Berkeley
Gordon Rausser, UC Berkeley
Steve Sexton
David Zilberman, UC Berkeley
February 20, 2008

Agriculture biotechnology applies modern knowledge in molecular and cell biology to produce new and improved varieties. It has transformed the production system of major field crops, such as soybeans, corn, cotton, and canola, which have experienced a high rate of adoption, and offers much promise for food products grown in the State of California (Rausser and Ameden 2004). Such potential benefits come from increased yields, lower risk, reduced use of chemical pesticides, gains from reduced tillage and other modified production practices, improved product quality, and saving in management, labor, and capital improvement (Kalaitzandonkes 2003; Just, Alston, and Zilberman 2006). Notably, however, the adoption of biotechnology has varied across location and has been concentrated in a small number of countries partly due to regulatory regimes (Zilberman 2006). The proposed work's main goal is to understand how such differences in regulatory regimes affect agriculture production and the environment, both in California and the EU. In this work we will document the differences in the regulatory frameworks as they apply to human health and environmental quality regulations. The various interpretation and modeling of the precautionary principles and substantial equivalence will be investigated, and a general conceptual framework for regulatory choices will be developed. The hypothesis is that the two seemingly different regulatory concepts are nested within one general model. This work will then use this regulatory model to identify directions to improve regulatory choices in both regions.

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Regulatory Politics and Policies in the United States and Europe: Why the Difference? (42kb .doc file)
CIG Working Paper No. 66
EXCERPT: Chapter 1 of EXPOSED: The Toxic Chemistry of Everyday Products and What's at Stake for American Power (Chelsea Green, 2007; 71kb .doc file)
Mark Schapiro, Center for Investigative Reporting
February 20, 2008

The following are notes addressing the question: Why such a different response to environmental reform in the United States and in Europe ? Also included is chapter 1 from my book, which explains some of the key issues and distinctions at stake, including:

• Relationship to Science
• Punitive vs. Preventative Regulatory Approach
• Lobbying
• Relationship to Nature
• Regulation and Innovation

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Muddling Through on the Cutting-Edge: How California and the European Union are Coping with the Risks of Nanotechnology (1.8 MB .doc file)
CIG Working Paper No. 67
Margaret Taylor, Goldman School of Public Policy, UC Berkeley
Javiera Barandiaran, Goldman School of Public Policy, UC Berkeley
February 22, 2008

Environmental economics justifies government's role in the environmental policy arena by the existence of the market failure of negative externalities. For illustration purposes, think of a company that manufactures and sells widgets of great utility to consumers. Said widget could have a number of negative externalities. As part of the manufacturing process, air and water could be polluted, with potential ecosystem risks, and workers could be exposed to health hazards. The consumer of the widget, as well as her friends and pets, could similarly be exposed to incidental hazards related to the widget. And at the end of the life of the widget, soil and water could be polluted and ecosystems could suffer damage. Ideally, the evolution of economic and scientific tools allows us to "internalize" these externalities, through the mechanism of environmental policy, to affect the bottom line of the firm that profits from the widget.

But what if there's no widget yet? This "hypothetical" situation is what actually confronts environmental policy-makers in the area of nanotechnology. This Working Paper documents the muddling-through efforts of California and the EU as they confront this cutting-edge environmental policy challenge. The next section of the paper provides more background about nanotechnology, including its promise and some of its known problems. The following section lays out some of the muddling-through efforts of California and the EU with respect to worker and consumer safety. The final section involves a discussion of preliminary conclusions and next steps.

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The Hare and the Tortoise Revisited: The New Politics of Consumer and Environmental Regulation in Europe (212kb .doc file)
CIG Working Paper No. 68
David Vogel, UC Berkeley
February 20, 2008

There has been an important shift in the pattern of divergence between consumer and environmental protection policies in Europe and the United States. From the 1960s through the mid 1980s, American regulatory standards tended to be more stringent, comprehensive and innovative than in either individual European countries or in the European Union (EU). However since around 1990, the obverse has been true; many important EU consumer and environmental regulations are now more precautionary than their American counterparts. The "new" politics of consumer and environmental regulation in Europe are attributable to three inter-related factors: a series of regulatory failures within Europe, broader and stronger political support for more stringent and comprehensive regulatory standards within Europe, and the growth in the regulatory competence of the European Union. In many respects, European regulatory politics and policies since the 1990s resemble those of the US during the 1970s. Thus health, safety and environmental politics and policies in the US are no longer as distinctive as many scholars have portrayed them.

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California Chemicals Policy and the European Union (112kb .doc file)
CIG Working Paper No. 69
Michael P. Wilson, School of Public Health, UC Berkeley
Megan R. Schwarzman, School of Public Health, UC Berkeley
February 22, 2008

Each day, a total of 42 billion pounds of synthetic chemicals are produced or imported in the United States for use in industrial processes and products. While these substances are useful to society, they can also be toxic to humans and ecosystems; in some cases, toxicity can occur at very low exposure levels. The primary legal framework for managing this great mass of material, the Toxic Substances Control Act (TSCA), is now over 30 years old and is widely recognized as having failed as a vehicle for government, the public, or industry to assess the hazards of chemicals or control those of greatest concern. As a consequence of the weaknesses of TSCA and other existing laws and policies, California faces a growing set of health, environmental and economic problems related to the design, use and disposal of chemicals and products. California's ability to respond to these factors could produce the building blocks of a comprehensive, long-term approach to improved management of chemicals and products, and they could motivate new investment in green chemistry innovation. This has the potential to 1) fuel global demand for safer substances, increasing the incentive for innovation in green chemistry, 2) contribute to improvements in human health, resource conservation, clean technology development, and environmental protection in California , and 3) shoehorn the U.S. into a position of greater collaboration in international efforts for sustainability.

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A Theory of Military Dictatorships (374kb .pdf file)
CIG Working Paper No. 70
Andrea Vindigni, Princeton University
Daron Acemoglu, MIT and CIFAR
Davide Ticchi, University of Urbino
April 3, 2008

We investigate how nondemocratic regimes use the military and how this can lead to the emergence of military dictatorships. Nondemocratic regimes need the use of force in order to remain in power, but this creates a political moral hazard problem; a strong military may not simply work as an agent of the elite but may turn against them in order to create a regime more in line with their own objectives. The political moral hazard problem increases the cost of using repression in nondemocratic regimes and in particular, necessitates high wages and policy concessions to the military. When these concessions are not sufficient, the military can take action against a nondemocratic regime in order to create its own dictatorship. A more important consequence of the presence of a strong military is that once transition to
democracy takes place, the military poses a coup threat against the nascent democratic regime until it is reformed. The anticipation that the military will be reformed in the future acts as an additional motivation for the military to undertake coups against democratic governments. We show that greater inequality makes the use of the military in nondemocratic regimes more
likely and also makes it more di¢ cult for democracies to prevent military coups. In addition, greater inequality also makes it more likely that nondemocratic regimes are unable to solve the political moral hazard problem and thus creates another channel for the emergence of
military dictatorships. We also show that greater natural resource rents make military coups against democracies more likely, but have ambiguous effects on the political equilibrium in nondemocracies (because with abundant natural resources, repression becomes more valuable to the elite, but also more expensive to maintain because of the more severe political moral
hazard problem that natural resources induce). Finally, we discuss how the national defense role of the military interacts with its involvement in domestic politics.

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Conflict and Deterrence under Strategic Risk (265kb .pdf file)
CIG Working Paper No. 71
Gerard Padro i Miquel, London School of Economics and NBER
Sylvain Chassang, Princeton University
April 9, 2008

We examine the mechanics of deterrence and intervention when fear is a motive for conflict. We contrast results obtained in a complete information setting, where coordination is easy, to those obtained in a setting with strategic risk, where players have different assessments of their environment. These two strategic settings allow us to define and distinguish predatory and preemptive incentives as determinants of conflict. We show that while weapons have an unambiguous deterrent effect under complete
information, this does not hold anymore under strategic risk. Rather, we find that increases in weapon stocks can have a non-monotonic effect on the sustainability of peace. We also show that under strategic risk, inequality in military strength can actually facilitate peace and that anticipated peace-keeping interventions may improve incentives for peaceful behavior.

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The Foundations of Limited Authoritarian Government: Institutions and Power-sharing in Dictatorships (312kb .pdf file)
CIG Working Paper No. 72
Carles Boix, Princeton University
Milan Svolik, University of Illinois at Urbana-Champaign
April 25, 2008

Why do some dictatorships establish institutions typically associated with democracy, such as legislatures or political parties? We propose a new theoretical model of authoritarian power-sharing and institutions in dictatorships. We argue that political institutions in dictatorships enhance the stability of power-sharing, and therefore the survival of these regimes. However, authoritarian power-sharing through institutions is feasible only when it is backed by the crude but credible threat of a rebellion by the ruler's allies. Whereas the allies' political opportunities -- rather than a contingent
coordination of beliefs among them -- determine the credibility of their rebellion, institutions resolve the commitment and monitoring problems caused by the secrecy in authoritarian governance. Our theory generates new predictions about the empirical relationship between political institutions, economic development, and leader tenure.

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Making Autocracy Work (698kb .pdf file)
CIG Working Paper No. 73
Timothy Besley, London School of Economics and CIFAR
Masayuki Kudamatsu, Institute for International Economic Studies (IIES),
Stockholm University
April 25, 2008

One of the key goals of political economy is to understand how institutional arrangements shape policy outcomes. This paper studies a comparatively neglected aspect of this -- the forces that shape heterogeneous performance of autocracies. The paper develops a simple theoretical model of accountability in the absence of regularized elections. Leadership turnover is managed by a selectorate -- a group of individuals on whom the leader depends to hold onto power. Good policy is institutionalized when the selectorate removes poorly performing leaders from office. This requires that the selectorate’s hold on power is not too dependent on a specific leader being in office. The paper looks empirically at spells of autocracy to establish cases where it has been successful according to various objective criteria. We use these case studies to identify the selectorate in specific instances of
successful autocracy. We also show that, consistent with the theory, leadership turnover in successful autocracies is higher than in unsuccessful autocracies. Finally, we show by exploiting leadership deaths from natural causes, that successful autocracies appear to have found ways for selectorates to nominate successors without losing power -- a feature which is also consistent with the theoretical approach.

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Dynamics and Stability of Constitutions, Coalitions, and Clubs (335kb .pdf file)
CIG Working Paper No. 74
Daron Acemoglu, MIT
Georgy Egorov, Harvard University
Konstantin Sonin, The New Economic School
April 25, 2008

A central feature of collective decision-making in many social groups, such as political coalitions, international unions, or private clubs, is that the rules that govern the procedures for future decision-making and the inclusion and exclusion of members are made by the current members and under the
current regulations. This feature implies that dynamic collective decisions must recognize the implications of current decisions on future choices. For example, current constitutional change must take into account how the new constitution may pave the way for further changes in laws and regulations. We develop a general framework for the analysis of this class of problems. We provide both an axiomatic and a non-cooperative characterization of dynamically stable states and show that, under reasonable assumptions,
these exist and are unique. We then apply our framework to a variety of problems in political economy, in coalition formation, and in the analysis of the dynamics of clubs. Major insights that emerge from this framework are: (1) A particular social arrangement is made stable by the instability of alternative arrangements that are preferred by su¢ ciently many members of the society. For example, stability of a constitution does not require absence of powerful groups opposing it, but the absence of an alternative constitution favored by powerful groups. (2) Efficiency-enhancing changes are often resisted because of further social changes that they will engender. Consequently, Pareto inefficient social arrangements often emerge as stable outcomes.

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A Theory of the Origins of Coercive Enforcement by the State: Insights from Colonial Mexico (241kb .pdf file)
CIG Working Paper No. 75
Luz Marina Arias, Stanford University
April 25, 2008

This paper contributes to our understanding of the factors that lead to the creation of a fiscal administration backed by centralized coercion through a historical and game theoretical analysis of colonial Mexico. In the model, the fiscal regime is endogenous: the ruler can choose to delegate the collection of revenue or to create a state administration. The essential trade-off is that the gains in efficiency under delegation come at a cost; collective objectives cannot be harmonized under delegation. The benefits others receive from someone's contribution cannot be internalized under delegation. The
presence of an external shock that creates the need to provide a public good -- in my analysis a standing army due to a threat of conflict -- can give rise to a coercive state administration which serves as a commitment device to overcome free riding. The analysis suggests that the enforcement mechanism used to collect revenue is endogenous to the excludable nature of the goods provided by the state.

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Does Decentralization Improve Individual Performance? Not really for Journalists (254kb .pdf file)
CIG Working Paper No. 76
Yanhui Wu, London School of Economics
May 21, 2008

In this paper, we explore a natural experiment of organizational change from decentralization to centralization in a leading Chinese newspaper. Using a differences-in-differences approach, we find that centralization on average increases the journalists’ performance, shedding light on the dark sides of decentralization. Contributions of this positive effect mainly comes from those journalists who are potentially associated with large private benefit and those who are victims of influence activities under decentralization. Our findings are consistent with recent economic theories of organization under a multi-tasking framework. The results highlight the importance of heterogeneity in organizational design.

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More Production is Safer Production? Effects of Shutdown Policy on China’s Coal Industry (287kb .pdf file)
CIG Working Paper No. 77
Xiaohan Zhong, Tsinghua University
May 21, 2008

A distinctly negative correlation between mortality and output can be observed in China’s coal industry in recent decade. This paper proposes a theory illustrating that output can be either positive or negative related to mortality, depending on three effects: demand effect, type I or industry effect, and type II or firm supply effect. The shutdown policy induces
type I supply effect by restricting entries, and type II supply effect by destabilizing property rights; both tends to decrease output while increase mortality. Using China’s cross-region panel-data in year 1995-2005, the paper finds that exogenous output (supply) changes have significant negative effects on mortality, thus indirectly proves the theory on effects of
shutdown policy. The paper suggests that a freer entry policy help produce more as well as save more lives.

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Profiting from Government Stakes in a Command Economy: Evidence from Chinese Asset Sales (270kb .pdf file)
CIG Working Paper No. 78
YongXiang Wang, Columbia University
May 21, 2008

We document the market response to an unexpected announcement of proposed sales of government-owned shares in China. In contrast to the "privatization premium" found in earlier work, we find a negative effect of government ownership on returns at the announcement date and a symmetric positive effect in response to the announced cancellation of the government sell-off. We argue that this results from the absence of a Chinese political transition to accompany economic reforms, so that the positive effects on profits of political ties through government ownership outweigh the potential efficiency costs of government shareholdings.
Companies with former government officials in management have positive abnormal returns, suggesting that personal ties can substitute for the benefits of government ownership. The "privatization discount" is higher for firms located in Special Economic Zones, where local government discretionary authority is highest. This is consistent with the view that firms in
these locations are more dependent on government connections. We also find that companies with relatively high welfare payments to employees, which presumably would fall with privatization, benefit disproportionately from the privatization announcement.

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Evaluating China’s Poverty Alleviation Program: A Regression Discontinuity Approach (530kb .pdf file)
CIG Working Paper No. 79
Hongbin Li, School of Economics and Management, Tsinghua University
Lingsheng Meng, Department of Economics, University of Maryland
May 21, 2008

This paper evaluates the impact of 8-7 Plan, the second wave of China’s poverty alleviation program, on rural income growth at the county level over the period 1994-2004. Program participation was largely determined by whether a county’s pre-program income fell below certain poverty lines. The discreteness of the assignment rule is exploited to obtain convincing estimates of the program effect. Using a panel dataset, we find that the 8-7 Plan resulted in a substantial gain in rural income for the treated counties. The empirical findings also indirectly reveal the important role of initial endowments in economic development.

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Property Rights Protection and Firm Horizontal Scope (345kb .pdf file)
CIG Working Paper No. 80
Julan Dua, Chinese University of Hong Kong
Yi Lub, University of Hong Kong
Zhigang Tao, University of Hong Kong
May 21, 2008

Horizontally diversified firms in related or unrelated industries are prevalent in many emerging economies. While it has been argued that diversified …rms may thrive in situations of poor market institutions, much research is needed to substantiate this idea. In this paper, using a survey data set of private enterprises in China, we examine how firm scope varies with respect to property rights protection, and how firm performance changes in the degree of property rights protection. We find that the horizontal scope of firms increases in the severity of property rights expropriation, and that firm performance decreases in property rights expropriation but this negative impact decreases with the horizontal scope of the firm. Our findings are robust to the use of alternative measures of firm scope, different indices of property rights protection, and two alternative instrumental variables for the property rights protection indices to control for the potential endogeneity
problems.

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FDI Spillovers in the Chinese Manufacturing Sector: Evidence of Firm Heterogeneity (1.49mb .pdf file)
CIG Working Paper No. 81
Filip Abraham, Jozef Konings and Veerle Slootmaekers
Catholic University of Leuven
May 21, 2008

We use a new longitudinal data set of more than 15,000 Chinese manufacturing plants to show that the direct and indirect e¤ects of foreign direct investment on measured firm level productivity depend on a number of firm specific features and institutional factors. We find that domestic firms engaged in a joint-venture with a foreign partner are on average more productive, as well as exporting plants and plants located in special economic zones. In addition, domestic firms benefit from horizontal spillovers from foreign firms on average. However, these spillovers depend on the structure and origin of ownership as well as on specific characteristics of the special economic zones. First, spillovers are less likely to occur from fully foreign owned firms than from joint-ventures. Second, spillovers from foreign direct
investment originating from overseas Chinese (Hong Kong, Macau and Taiwan) are stronger than from the rest of the world. Third, spillovers are higher in the special economic zone aimed at attracting foreign capital to fasten the development of China’s own high-tech industries.

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How much of Chinese exports is really made in China? Assessing domestic value-added when processing trade is pervasive (585kb .doc file)
CIG Working Paper No. 82
Robert Koopman, United States International Trade Commission>
Zhi Wang, United States International Trade Commission
Shang-Jin Wei, Columbia University, CEPR, and NBER
May 26, 2008

As China's juggernaut export machine employs many imported inputs, there are many policy questions for which it will be crucial to know the extent of domestic value added ( DVA ) in its exports. The best known approach is the concept of "vertical specialization" proposed by Hummels, Ishii and Yi (2001) (HIY for short). This approach is not appropriate for countries that engage in a lot of processing exports such as China, Mexico, and Vietnam. We develop a general formula for computing domestic and foreign contents when processing exports are pervasive. Because the new formula requires some input-output coefficients not typically available from a conventional input-output table, we propose a mathematical programming procedure to estimate these coefficients by combining information from detailed trade statistics with input-output tables. By our estimation, the share of foreign content in China 's exports is at about 50%, almost twice as high as the estimate from the HIY formula. There are also interesting variations across sectors and firm ownership. Those sectors that are likely labeled as relatively sophisticated such as electronic devices have particularly high foreign content (about 80%). Foreign-invested firms also tend to have higher foreign content in their exports than domestic firms.

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Time to Change What to Sow: Risk Preferences and Technology Adoption Decisions of Cotton Farmers in China (1.14mb .pdf file)
CIG Working Paper No. 83
Elaine Liu, Princeton University
May 26, 2008

The slow diffusion of new technology in the agricultural sector of developing countries has long puzzled development economists. While most of the current empirical research on technology adoption focuses on credit constraints and learning spillovers, this paper examines the role of individual risk attitudes in the decision to adopt a new form of agricultural biotechnology in China. I conducted a survey and a field experiment to elicit the risk preferences of 320 Chinese farmers, who faced the decision of whether to adopt genetically modified Bt cotton a decade ago. Bt cotton is more effective in pest prevention and thus requires less pesticides than traditional cotton. In my analysis, I expand the measurement of risk preferences beyond expected utility theory to incorporate prospect theory parameters such as loss aversion and nonlinear probability weighting. Using the parameters elicited from the experiment, I find that farmers who are more risk averse or more loss averse adopt Bt cotton later. Farmers who overweight small probabilities adopt Bt cotton earlier.

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Credit Constraints, Job Mobility and Entrepreneurship:
Evidence from a Property Reform in China (409kb .pdf file)
CIG Working Paper No. 84
Shing-Yi Wang, Yale University
May 28, 2008

This paper provides new evidence on the impact of private property rights on entrepreneurship. I explore this issue in the context of a housing reform in urban China that allowed state employees living in state-owned rental units the opportunity to buy their homes at subsidized prices. Using the reform as an exogenous change in the capital constraints and mobility costs that influence individuals' entry into entrepreneurship, my estimates suggest that the property reform increased self-employment. I develop a model of job choice to test two mechanisms that might explain how the reform increased
entrepreneurship. I find that the reform increased the ability of individuals to finance entrepreneurial ventures by allowing them to capitalize on the value of the real estate. The unbundling of housing benefits from state employment also contributed to the increase in entrepreneurship by facilitating labor
mobility out of the state sector.

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Estimating a Dynamic Model of Sex Selection in China (730kb .pdf file)
CIG Working Paper No. 85
Avram Ebenstein, Harvard University
May 2008

High ratios of males to females in China have historically concerned researchers (Sen 1990) and their recent increase has alarmed policymakers worldwide. In this paper, I present a model of fertility choice when parents have access to a sex selection technology and face a mandated fertility limit. By exploiting variation in fines levied in China for unsanctioned births, I estimate the relative price of a son and daughter for mothers observed in China's 2000 census. I find that a son is worth .56 years of income more than a daughter, and the premium is highest among less educated mothers and families engaged in agriculture. I conclude with a set of simulations to predict the effect of revisions to China's fertility regulations, such as allowing all couples a second child and initiatives to subsidize parents who have daughters.

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Substitution Effects in Parental Investments (454kb .pdf file)
CIG Working Paper No. 86
Loren Brandt, Aloysius Siow, Hui Wang, Toronto University
May 2008

Parents have to decide how much and how to invest in each of their children. Becker proposed that parents choose among different types of investments for each child efficiently and that they also choose investments to equalize wealth across their children. Existing empirical tests of this hypothesis using across family variations in investments suffer from unobserved family heterogeneity. Family fixed effects methods have been suggested and used, although their interpretation has not been well articulated.

The contributions of this paper are two fold. First, we provide an empirical framework to study substitution effects in parental investments in the presence of unobserved family heterogeneity, unequal parental valuations of their investments across children, and unobserved differences in child abilities. Second, we implement this framework using a unique data set on parental investments in education and marital transfers in rural China.

Our household fixed effect regressions show that marital transfer is negatively correlated with educational investment. If the educational investment in one son is lower than that of his brothers by 1 yuan, he will be compensated by receiving 33 cents more than his brothers in marital transfers; the corresponding result for daughters is 12 cents. Differences in marital transfers across children do not fully compensate for differences in educational investments. These results cannot be explained by unequal valuations by parents or measurement problems. Instead they suggest that there are strategic considerations within the family. We also find evidence against equal valuations across parental investments for different children in the same family. Across daughters, parents invest more in their older daughters. This first child bias is not present among sons.

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Long-term Effects of Early-life Development: Evidence From the 1959-1961 China Famine (969kb .pdf file)
CIG Working Paper No. 87
Douglas Almond, Columbia University and NBER
Lena Edlund, Columbia University
Hongbin Li, Tsinghua University
Junsen Zhang, Chinese University of Hong Kong
June 18, 2008

This paper estimates the effects of maternal stress and malnutrition using the 1959-1961 Chinese famine as a natural experiment. Observed forty years later in the 2000 China Census (1% sample), Famine survivors showed impaired literacy, labor market, wealth, and marriage market outcomes. In addition, maternal malnutrition reduced the sex ratio (males to females) in two generations - those prenatally exposed and their children - presumably through heightened male mortality. This tendency toward female cohorts is interpretable in light of the Trivers-Willard (1973) hypothesis, according to which parents in poor condition should skew the offspring sex ratio toward daughters. Hong Kong Natality micro data from 1984-2004 further confirm this pattern. The persistence of poor nutrition in China - particularly in rural areas and among girls - suggests that health and economic outcomes will be compromised well into the 21st century.

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