China Agricultural University PhD, application-and-assessment track Institutional Economics: practice questions

1 · Transaction costs · hard

What did Coase himself regard as the main policy lesson of 'The Problem of Social Cost'?

1. Since real transaction costs are positive, the legal assignment of rights and the choice of institution affect efficiency
2. Since property rights are costly, all externality problems should be solved through public ownership of resources
3. Since harm is reciprocal, the party causing physical damage should always be taxed at the rate of marginal damage
4. Since bargaining always reaches efficiency, the state need never intervene in disputes over harmful effects

2 · Institutional change · medium

North (1990) explained why inefficient institutions can persist for long periods mainly by

1. the fact that competition between societies quickly eliminates any institution that does not maximise output
2. increasing returns and path dependence, together with the interests of organisations created under existing rules
3. the zero transaction costs of political markets, which always let the losers from a reform compensate the gainers
4. the assumption that all agents hold the same accurate model of the economy and so agree on reform

3 · Institutional change · medium

China's household responsibility system, spreading from about 1978, is a standard example of institutional change because it

1. transferred full private ownership of farmland, including the right to sell it, to individual rural households
2. abolished state grain procurement and let all prices be set by world markets from the start
3. replaced household farming with large state farms run by salaried managers and wage workers
4. returned farming decisions and residual output to households while land stayed collectively owned

4 · Institutions and resource allocation · hard

A contract gives a farmer 150 per season more than his next-best option. He discounts each future season by a factor of 0.8 and expects to be dropped permanently if he side-sells. This season side-selling would gain 400. Will he side-sell?

1. No: the present value of future contract gains, 150 × 0.8 / 0.2 = 600, exceeds the 400 gain
2. Yes: the 400 gain exceeds the 150 surplus he would lose in the next season alone
3. No: the present value of future gains is 150 / 0.8 = 187.5, which exceeds the 150
4. Yes: the present value of future gains is 150 × 0.8 = 120, which is below 400

5 · Property rights · hard

Besley (1995) found that stronger land rights were associated with more tree planting in parts of Ghana but cautioned about interpretation. Why?

1. Tree planting is a consumption good, so it cannot be counted as investment in any economic analysis
2. Stronger rights always reduce investment, so the correlation must reflect an omitted price effect
3. Planting trees can itself strengthen land claims, so investment may cause rights rather than rights cause investment
4. Ghanaian land is entirely state-owned, so measured rights can only be a statistical error in the survey

6 · Property rights · hard

Barzel's analysis of property rights adds which insight to Demsetz's?

1. Rights are irrelevant to efficiency because competitive markets allocate resources well under any rights
2. Rights are always complete once a title is issued, so the cost of measuring attributes is irrelevant to allocation
3. Rights emerge only through state legislation and never through private agreement or custom among users
4. Rights are never complete; attributes too costly to measure are left in the public domain and people spend resources capturing them

7 · Tenancy and sharecropping · hard

Output on a plot is Q = 40√L, the output price is 1 and labour's opportunity cost is 2 per unit. A sharecropper keeps half the output and bears all labour costs. How much labour does he apply, and how much would a fixed-rent tenant apply?

1. 25 units as a sharecropper and 50 units as a fixed-rent tenant
2. 100 units as a sharecropper and 400 units as a fixed-rent tenant
3. 25 units as a sharecropper and 100 units as a fixed-rent tenant
4. 50 units as a sharecropper and 100 units as a fixed-rent tenant

8 · Tenancy and sharecropping · hard

A tenant keeps half the output of Q = 60√F, where F is fertiliser, the output price is 1 and fertiliser costs 1.5 per unit. The tenant pays all fertiliser costs. How much fertiliser does he apply, compared with an owner-cultivator?

1. 400 units, against 100 for an owner-cultivator
2. 200 units, against 400 for an owner-cultivator
3. 100 units, against 200 for an owner-cultivator
4. 100 units, against 400 for an owner-cultivator

9 · Interlinked agrarian markets · medium

Braverman and Stiglitz (1982) showed that a landlord who also lends to his sharecropper

1. can use the loan terms to influence the tenant's effort, partly offsetting the share contract's disincentive
2. will always block technical change because it reduces the tenant's need to borrow
3. cannot affect the tenant's behaviour, because credit and land markets are independent
4. must charge the market interest rate, since any other rate would generally be illegal

10 · Interlinked agrarian markets · medium

Aleem's (1990) study of informal moneylenders in Chambar, Pakistan, found that their high interest rates mainly reflected

1. government interest-rate ceilings that forced lenders to charge above the ceiling
2. high screening, collection and default costs rather than large monopoly profits
3. large monopoly profits, since lenders faced no competition from other lenders
4. the very low cost of lending, which attracted too many lenders to the market