W03: How institutions affect business across countries

Question 1

What is needed for a market to function?

Answer 1

• trustworthiness of sellers and buyers
• information symmetry by the evaluator
• trust to the evaluator

Question 2

Institutions Definition

Answer 2

Institutions are rules and procedures that reduce uncertainty and induce cooperation/exchange by establishing structure and incentives for interactions among players

Question 3

What do institutions do?

Answer 3

Institutions can facilitate market transactions through

• reducing information asymmetries
• aligning incentives
• reducing transaction costs
• generating trust

Question 4

Institutions generate trust through

Answer 4

1. Information analyzers and advisors
2. Credibility enhancers
3. Aggregators and Distributors
4. Regulators
5. Transaction Facilitators
6. Adjudicators

Question 5

The institutional environment of business is about

Answer 5

1. Voice and Accountability - Ability of citizens to participate in selecting their government
2. Political Stability - perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means
3. Government Effectiveness - Quality of public and civil services
4. Regulatory Quality - Ability of the government to formulate and implement sound policies and regulations
5. Rule of Law - the extent to which agents have confidence in and abide by the rules o society
6. Control of Corruption - the extent to which public power is exercised for private gain

Question 6

Comparing institutions across countries

Answer 6

1. Government effectiveness
   - 6 Questions related to that
2. Institutional Infrastructure of capital markets
   - 6 Questions related to that
3. Institutional infrastructure of product markets
   - 6 Questions related to that

Question 7

Institutional voids (assumptions)

Answer 7

Institutions found in developed markets are often missing or absent in developing countries(comparative institutional concept)

• > Void is the western bias that the institutional architecture in emerging markets is bad.
• > Model builds on an institutional conception of markets: markets are socially created rather than naturally given

Most western economic models make assumptions about the institutional environment, such as

• the presence of property rights,
• third-party contract enforcement
• credible information

Question 8

Arrangement in capital markets (also micro-financing)

Answer 8

Getting funds:

• In Developed countries: credit card, loan from a bank, funds from investors
• Alternative: family and friends, trade credit from business partners, microfinance (Grameen Bank)

Microfinancing:

Microfinance (loans to groups of small-scale entrepreneurs with shared liability)

• Collective responsibility and group pressure
• Bank representatives traveling from village to village and meeting groups of borrowers
• Maintaining close relationships with borrowers and monitoring the progress of their businesses

Question 9

Arrangement in product markets

Answer 9

In emerging markets large share in mom- and pop stores
i.e. onion market in India

• Many markets in need of efficiency
• But don’t want to replace local retailers

Question 10

Arrangements product markets: hidden advantages of traditional retail

Answer 10

• Unpaid labor from family and friends
• Pay no rent because they own their storefronts
• Don’t pay corporate taxes

-> Modern retailers face major challenge when competing with local retailers