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Institutional dynamics and strategic behavior: regulation, market attitudes and mobility

Priority areas of development: economics
2018
The project has been carried out as part of the HSE Program of Fundamental Studies.

Research goal of this project is to assess the influence of institutional factors, institutional changes, and socio-economic shocks in Russia on the behavior of economic agents on the banking services market and in the sphere of public procurement, and also on the attitude of individuals to markets and political, social, and economic mobility.

Methods

Most objectives of the project are empirical and they are reached by means of the methods of economic analysis. There were also used methods of social networks analysis and experimental economics.

Empirical basis

There was used the following data: RLMS-HSE (Russian Longitudinal Monitoring Survey); Russian Federal State Statistics Service (Rosstat); clearspending.ru (GovernmentSpendings/GosZatraty); SPARK (Verification, analysis and monitoring of companies); World Values Survey; LITS I, II (Life in Transition Survey); Monitoring the Quality of Enrollment in Russian Universities; Analytics Platform «Banks and Finance» (Mobile); bankovedenie.ru; guidebooks of petroleum bases of the Russian Federation; “Russian Oil Refineries” guidebooks; information from the public procurement and public contractors websites.

Results

For studying the strategies of agents on banking services markets, there were analyzed the strategies of banks for increasing deposit rates as a signal of their prospective bankruptcy within the next 2–3 months. Using unique data on deposit rates in 2015–2016 and data of „Banks and finance” (Mobile) reports, we assessed the probability of influence of two types of rates increase — setting rates higher than the market average and a more aggressive strategy of increasing the rate to make it higher than the average market increase — on banks’ defaults. The results show that if a bank offers too generous deposit rates for the period of 180–365 days following the second type of increase, this may signify high probability of its license withdrawal within three quarters. If a bank offers higher rates for long term deposits than the market average, probability of its bankruptcy within a year increases.

Using the results of two experiments with HSE bachelor students of the second and the fourth year of education, it was studied how peer effects and peer interactions in student groups — friendship network and assistance exchange network — influence the probability of depositors’ influx. The results show that peer effects may both promote and prevent depositors’ influx. In particular, information on who is the client of the bank undermines its stability, however, creating potential for cooperation, assistance exchange networks balance this effect, thus preventing depositors’ influx. Increasing peer effects, however, lower this effect since students know each other’s academic achievements well and do not rely on recent experience of communication with peers.

In order to study the influence of banks transparency on their potential in terms of attracting additional funding, the role of voluntary information disclosure by Russian banks as a source of data about risk on the market of giving loans between banks was considered. The analysis was carried out on the basis of data on 179 biggest Russian banks in 2004–2013. It was discovered that bigger banks that are risky in terms of loaning are more transparent. It was also shown that the ability to attract funding on a market of loaning between banks positively correlates with the level of transparency of Russian banks.

In terms of the analysis of pro-market values economic growth and social mobility on the microeconomic level, there were discovered new empirical links between a change in socio-economic indicators and a change in views to government policy (creating work places, building roads, providing medical services and managing trash disposal). It was established that the growth of optimism and economic welfare of individuals lowers demand for state intervention to economics, and the level of education of individuals implicitly lowers demand for state regulation of economics by performing a function of a social elevator.

Using the methodology developed by Gregory Clark (2014), there were calculated correlation coefficients for educational status among generations of Russian population during the period of IXX—XXI centuries. High values of correlation coefficients indicate that the elite preserves high probability of getting elite education for centuries. Preliminary results speak of higher level of social mobility in the USSR in comparison with the UK and the US.

Drawing conclusion to the analysis of public sector and public procurement, it was discovered that with growth of state financing, yearly loan disbursements increase and debt accumulated within a year decreases. The growth of transfers amount leads to decrease of tax revenue. There was offered a method of corruption evaluation on the basis of the analysis of contracts of contractor and customers through the prism of the reserve price set by the customer. We suggest the conclusion that the reserve price is formed by the customer prior to the auction, and consequently, there is no statistically significantly link between the set reserve price and the winner of the auction. Evaluation is being carried out in two steps. First, there is built an evaluation of reserve price in correlation with the market price of a product, parameters of a contract, and characteristics of a customer including fixed effects on a customer and a customer-contractor couple. Second, these fixed effects on a customer and a customer-contractor couple are compared. In case the effects are larger for a customer-contractor couple, the reserve price in contracts of these customers and contractor was set higher than for other contracts, and such actions are considered to be corrupt. The advantage of this method is that calculations are based on data available to any regulator — the reserve price and the IDs of customers and contractors. This method can be used for markets of homogeneous products. It was tested on data of petrol procurement in Russia and showed that for the detected corrupt couples contract prices were higher and competition was lower, which proves corrupt motives of behavior.

Analyzing behavior of bidders in average-price auctions in public procurement in an Italian region Valle d'Aosta, it was discovered that in reality, bids of firms do not correlate with equilibrium bids and are characterized by systematic inhomogeneity. It was shown that behavior of firms may be explained by the model of cognitive hierarchy, according to which all firms differ in ability to calculate the right strategy for behavior. Only “advanced” bidders make bids that are the closest to optimal. It was also discovered that there is observed a learning process: the more a firm participates in auctions of this sort, the closer its bids are to the optimal ones.

In terms of roadworks procurement, there was studied an influence of experience on auction procedures and results of contract works and discovered that more experienced bidders make contracts that are more likely to be fulfilled in time, however, their competitiveness during auctions is lower. Such results imply that customers that previously faced problems at the stage of contract fulfillment are prone to limit competition in favor of a previously tested and well-known contractors. This statement is proved by the evidence that for repeated contracts, the probability of being fulfilled with serious delays is significantly lower.

Extent of implementation, recommendations on implementation or results of implementation of the research results

The results received in terms of the analysis of banking sector can be used for the optimization of regulatory policy in the sphere. The results of the analysis of specific price strategies on the market of deposits can be used both by the depositors and the regulators. The depositors are offered to pay attention to a general financial state of a bank before taking an extremely lucrative deposit offers and attempting to invest funds trustfully, profitably, and for a long time. The regulators monitoring price policy of banks on the market of retail deposits are offered to go beyond the limits of rates ceiling based on the rates of 10 largest banks. Generous offers of rates higher than the market average can serve as a signal to regulators to pay careful attention to banks choosing this strategy since often they do so in order to accumulate significant volumes of deposits right before the default, which results into ACB having to compensate much larger sums, which tells on the welfare of tax payers and economy in general. The results of the analysis of experimental data testify the necessity to take into account information that depositors of one bank have about each other and kind of their relations. It was shown that peer effects may both stimulate depositors’ influx and prevent it, thus increasing banking sector stability and preventing the effect of contamination. Finally, the results of the study of the banks transparency role on the interbank credits market prove the necessity to stimulate voluntary disclosure of information by the banks. This will both allow risky banks to gain access to loans on the interbank creates market and, at the same time, not lead to an overall increase of risks since market discipline mechanisms will operate effectively. Therefore, it is probable that in periods of financial unsteadiness, problems of market freeze and contamination will be mitigated.

In terms of the analysis of pro-market values, economic growth, and social mobility on the microeconomic level, the results witness that economic policy plays an important part in forming adaptation of individuals to markets. The complex of political measures should include state involvement in finding work places for individuals, implementing a program of subsidizing studies for the professions that are most requested on the market and creating possibilities for receiving free education for such professions, developing tax relief and accreditation for institutions of private sector capable of providing quality extended education. Positive correlations of institutional trust and pro-market values testify the necessity to broaden social responsibility of institutions and promoting their involvement in social life.

Conclusions and evaluations of empirical models of work can be used by the Ministry of Economic Development of the Russian Federation for the development of the programs for the optimization of public utility effect of macro- and microeconomic reforms. Methodological statements of the research were used for the creation of the “Western Economic History” round table resolution (Peking University, May 7-11, 2018).

The results received in terms of the analysis of public sector and public procurement can be used to identify contracting agents and procurement procedures that have to be checked immediately. The developed methodology aims at identifying favoritism: when precedence is given to a particular contractor over other ones. The methodology allows to identify such relations even if customers try to hide them by giving a part of contracts to other contractors. Moreover, our results show that procurement experience of contractors is very important, and subsequently, it is worth investing into staff that manage and perform procurement procedures. The results of studies are included in the course on institutional economics for bachelor students of the third and the fourth year of education at the National Research University Higher School of Economics.

Publications:


Coviello D., Moretti L., Spagnolo G., Valbonesi P. Court Efficiency and Procurement Performance // The Scandinavian Journal of Economics. 2018. Vol. 120. No. 3. P. 826-858. doi
Bardelli L., Valbonesi P. Asymmetric regulation and incentives for quality provision: the new phase for the Italian water services, in: Facing the Challenges of Water Governance Issue 1. Palgrave Macmillan, 2019. doi Ch. 2. P. 57-83. doi
Galavotti S., Moretti L., Valbonesi P. Sophisticated bidders in beauty-contest auctions // American Economic Journal: Microeconomics. 2018. Vol. 10. No. 4. P. 1-26. doi
Atmaca S., Schoors K., Verschelde M. Bank loyalty, social networks and crisis // Journal of Banking and Finance. 2018. P. 1-13. doi
Saussier S., Valbonesi P. Public Procurement—new theoretical and empirical developments // Economia e Politica Industriale. 2018. Vol. 45. No. 1. P. 1-4. doi
Semenova M., Bondarenko M. Do High Deposit Interest Rates Signal Bank Default? Evidence from the Russian Retail Deposit Market / National Research University Higher School of Economics. Series WP BRP FE "Financial Economics". 2018. No. 65FE2018.
Corazzini L., Galavotti S., Valbonesi Paola. An Experimental Study on Sequential Auctions with Privately Known Capacities / Ca Foscari University of Venice. Series No. 30/WP/2017 "Dipartimento di Economia Research Paper Series". 2017. doi
Guillemin F., Semenova M. Transparency and Market Discipline: Evidence from the Russian Interbank Market / NRU Higher School of Economics. Series FE "Financial Economics". 2018. No. WP BRP 67/FE/2018.
Semenova M. A Bank Run in a Classroom: Do Smart Depositors Withdraw on Time? / National Research University Higher School of Economics. Series WP BRP "Financial Economics". 2018. No. 64/FE/2018.