HSE Seminar on Political Economy: Irina Levina (HSE IIMS) about the Decentralization of Firms in a Country with Weak Institutions

Irina Levina studied evidence from Russian firms to explore whether decentralization of firms can be successful under weak institutions. She introduced the concepts of real decentralization for the delegation of decision-making authority in firms to professional people hired though open competition, and of cautious decentralization – for the delegation to people hired through connections. Irina demonstrated that really decentralized Russian firms are, on average, significantly more likely to implement investment.

Topic: Decentralization of Firms in a Country with Weak Institutions: Evidence from Russia

Abstract:

In this paper, we study evidence from Russian firms to explore whether decentralization of firms can be successful under weak institutions. We introduce the concepts of real decentralization for the delegation of decision-making authority in firms to professional people hired though open competition, and of cautious decentralization – for the delegation to people hired through connections. We argue that real decentralization has a potential to significantly improve the efficiency of firms; benefits that real decentralization can yield to firms’ efficiency can be so important that they can outweigh agency costs of decentralization even under weak institutions. However, the higher the role of corruption for economic wellbeing of firms under weak institutions, the lower the firms’ returns on being economically efficient, and therefore, the lower the returns on real decentralization. Our empirical results demonstrate that really decentralized Russian firms are, on average, significantly more likely to implement investment. The gap in probability of investment between really decentralized and other Russian firms is very substantial under the low or medium values of corruption; however, the gap declines as corruption grows and becomes statistically insignificant under the very high values of corruption.

the joint seminar of Higher School of Economics on political economy, International Center for the Study of Institutions and Development (ICSID) and NES Center for the Study of Diversity and Social Interaction (NES CSDSI) was held on December 18.

Moderators: Alexei Zakharov (HSE), Konstantin Sonin (HSE, The University of Chicago Harris School of Public Policy)