Three Essays On Institution

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The first paper studies how poor quality of institution, such as corruption in public procurement auction, could hurt welfare. We show how competition effect could improve the cost-efficiency but not the quality of a public procurement auction with corruption. In fact, no incentive mechanism can be efficient in this auction if qualities are non-contractible. An empirical study suggests that increasing the number of bidders does increase the percentage cost efficiency albeit at a decreasing rate and decreases the percentage cost efficiency after it reaches a certain number of bidders. In the second paper, we study how endogeneity between welfare and institutions might make institutional reforms more subtle. We use evidence from an in-depth field study conducted in five districts in Indonesia and build a model that illustrates how initial socioeconomic conditions as well as past institutions generate institutional complexes, including the degree of local capture, local leadership, and participation level. By endogenizing the degree of local capture, we show how cooperation between local leaders and local elites could positively or negatively affect welfare depending on the initial socioeconomic conditions. These institutional complexes that evolve with welfare create self-reinforcing progresses in the long-run. In the context of Indonesia in the post-decentralization period, exogenous shocks, such as an introduction of central government's enforcements s on both strengthening local institutions and increasing welfare are needed. In the third paper, we study how economic institutions intertwine with political institutions. A theoretical study of a simple strategic complementary game with private and public information among partially informed agents such as central banks shows that initial fundamentals might give rise to different levels of transparency. An empirical study shows that both economic fundamentals such as the reserve ratio of broad money to foreign exchange reserves and non-economic fundamentals such as an occurrence of crisis and the level of democracy do affect transparency of central banks. We apply this analysis to study the coordination effect of information on the progress towards regional financial integration among East Asian countries. We find that the progress towards regional financial integration might rely more on polity rather than on economic fundamentals.

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