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Why People Pay More Under Proportional Rule?: Electoral Systems, Corporate Governance and Price Differences Jaekwon Suh UCLA.

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Presentation on theme: "Why People Pay More Under Proportional Rule?: Electoral Systems, Corporate Governance and Price Differences Jaekwon Suh UCLA."— Presentation transcript:

1 Why People Pay More Under Proportional Rule?: Electoral Systems, Corporate Governance and Price Differences Jaekwon Suh UCLA

2 Why Price Matters ? Signals of Price Producer - production cost - accessibility to production factors - a proxy measure of government service (rent-seeking) Globalization makes producer more sensitive to price Consumer Purchasing power of disposable income

3 Motivation Why people pay more in a country than those in another country? Law of One Price absent politically imposed barriers Politics matters

4 Fact

5

6 Summary Statistics: Price

7 Precursor Research Rogowski & Kayser (AJPS 2002) : Majoritarian electoral system lowers price more than proportional system seat-vote elasticity … higher seat vote elasticity of majoritarian system makes politicians cater more on consumer than producer….

8 TM Two-stage sequential price determination game 1stElectoral system Corporate gov. Factor markets: Capital + Labor Agents : Entrepreneur, Rentier, worker (Pagano & Volpin AER2005) 2ndCorportate gov. Price Product market Agents: Firm (producer) vs. Consumer

9 1st Stage: Factor Markets Time schedule t = 0 : contract & establishing firm t = 1 : voting (for company law) t = 2 : re-contract t = 3 : dividing profit Solution: Sub-game Perfect

10 1st stage: Agents Agents: - homogeneous: entrepreneur & worker - heterogeneous: rentier Utility Functions - U E = E V + D - U R = R V + B R - U w = E(c) - e V: value of firm D: benefit of controlling firm B: debt holding c = wage + w V + B w : disutility of e (effort)

11 1st Stage: voting (t = 1) Premise - two party competition - electoral system: maj. vs. proportional - two policy spaces (company law) : employment protection (labor market) + shareholder protection (financial market)

12 1st stage: political coalition Characteristics of Electoral system majoritarian : winning districts proportional : winning votes Prediction Majoritarian: entrepreneur + rentier shareholder type corp.gov. Proportional: enterpreneur + worker blockholder type corp.gov.

13 2nd stage: product market Firm as a unified producer: - Firms price bidding as a function of profit structure: business profit + enterprise value Consumer as a composite group - consumers nature as a function of political coalition at the 1st stage, whether take or deny the price?

14 2nd stage: Prediction High price under Blockholder type - Firm bids high price : higher cost pressure (high employment protection) + greater need for high level of retained earning (low shareholder protection lack of capital market) why should consumer take it ? Low price under Shareholder type - Firm bids low price : lower cost pressure (flexible labor market) + greater risk for high level of retained earning (high shareholder protection developed capital market) why wont firm raise price and give more dividend shareholder?

15 EI: 2 SLS regression analysis System of Equations - Price = ƒ (CgÔv, income, openness…) - CgÔv = ƒ (elesys, IV…) * IV = Legal Origin (La Portal et al. 1998) Obstacles - extrapolation problem(Ho 2005) - aggregation problem

16 EI: Case Studies Possible nice case: Japan Reality: Since early 1990, Japan experienced sharp real price decrease. Explanation: Just monetary phenomenon My Model suspects that electoral system change in (more Maj.based on district size) can be an explanation.

17 Discussion: TM Internal inconsistency of the model Three agents Two agents Too many steps High complexity Price determination is not bargaining game 4 Keep three agents at the second stage and plugging role of government 4 Two stages one stage (parameterize P in the first stage?)

18 Discussion: EM Regression Analysis Measurement: - electoral system - corporate governance More case studies Computational methods Experimental design


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