1. No category

Costs and Benefits of Private
Property: The Case of Land
Ownership by Russian Firms
Paul Castañeda Dower (New Economic School)
Egor Malkov (Higher School of Economics)
Leonid Polishchuk (Higher School of Economics)
William Pyle (Middlebury College)
April 9, 2015
XVI April International Academic Conference on Economic and Social Development
Institutional Complementarity
• Payoff to economic institutions could be
contingent on surrounding institutional
environment (Aoki, 1992)
• Policy which are sound and efficiencyenhancing under enabling institutions could
bring about opposite results when institutions
are poor
• A case in point: land ownership
Research Question
How does land ownership affect performance of
firms in Russia?
Motivation I
• Rapid privatization in Russia in 1990s
– Firstly, equipment, buildings, and other structures
• Land privatization
– Initially land plots remained state-owned
– After bunch of laws in 1994–1997 34.5 hectares in
about 50 Russian regions were transferred to
private enterprises
– Russian Federation Land Code (2001) and Federal
Law 212 (2007) – unification of titles to land and
buildings and fairly cheap privatization
Motivation II
Privatized firms
Legal entities
Log Number of Transactions
9,9
9,4
8,9
8,4
7,9
7,4
6,9
6,4
5,9
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Reports on the State and Use of Land in Russia, 2000-2011
Background I
“What the poor lack is easy access to the
property mechanisms that could legally fix the
economic potential of their assets so that they
could be used to produce, secure, or guarantee
greater value in the expanded market...Just as a
lake needs hydroelectric plant to produce usable
energy, assets need a formal property system to
produce significant surplus value”
(de Soto, 2000)
Background II
• Land ownership
– Improves access to credit through better access to
collateral (Alston et al., 1999)
– Increases propensity to invest (Besley, 1995;
Galiani, Schargrodsky, 2010)
– Reduces the opportunity cost of employment (Field, 2007)
• But various institutions could complement each
other!
• Land ownership as a double-edged sword
– It could leave economic agents worse off under monopoly
lending (Besley, Burchardi, Ghatak, 2012)
Background III
“Если не принимать во внимание кулуарную борьбу
различных властных структур, выкуп земельных
участков под приватизированными предприятиями
является, по мнению специалистов, явно
положительным моментом в формировании рынка
недвижимости и развития производственной
деятельности предприятий… Итак, что же дает
выкуп земельных участков предприятиям? Вопервых, конечно, большую вероятность привлечения
инвестиций… Во-вторых, предприятие —
собственник земельного участка может более
эффективно использовать незастроенные площади
— заложить их, сдать в аренду, либо попросту
продать” («КоммерсантЪ», 11 февраля 1995 г.)
Hypotheses
• Hypothesis 1: land ownership benefits firms
(access to credit/increased investment
incentives)
• Hypothesis 2: land ownership can make firms
more vulnerable to predation
• Hypothesis 3: overall impact of land
ownership on economic performance is
uncertain and depends on institutional
environment
Theoretical Model I
• Two-period model
• Two agents: firm and potential raider (prob. 1   )
 F  x  – neoclassical production function
n
zi /  z j – probability to obtain prize A
j 1
• In Nash-equilibrium each agent obtains A/4
• No raiding if A/4 < c, where c is fixed costs of
raiding
Theoretical Model II
•
•
•
•
•
•
•
No property rights on land
 F  x  – prize
Firm’s problem:  1     F  x   x   max
x
1
Define X     F 
Optimal level of investment: x  X  1     
No raiding if  F  X  1        4c
Such outcomes are more likely for smaller
firms (smaller  )
Theoretical Model III
•
•
•
•
•
•
Property rights on land
Z   F  x  – prize (where Z is value of land plot)
First-best (perfect property rights)
Optimal level of investment: x  X  1     
Second-best (weak property rights)
Expected firm’s gain (risk of raiding and
security costs are taken into account):
 Z   F  x  / 4
Theoretical Model IV
Expected profit of firm: 1   / 4  F  x   x   Z / 4
Optimal level of investment: x  X  1   / 4   
Condition of raiding:  F  X  1   / 4      Z  4c
Land ownership negatively affects investment
and economic performance of the firm
• Smaller and/or less profitable firms sitting on
valuable land plots
•
•
•
•
Data Sources
• BEEPS 2009 and 2012 (Business Environment
and Enterprise Performance Survey)
– Data on private firms’ characteristics, business
environment, etc.
• Rosreestr
– Data on land ownership
Preliminary Results
• BEEPS 2009 (1004 Russian firms from 20
regions)
• Land ownership improves access to finance…
• … but is associated with more time spending on
dealing with government regulations and
higher pressure from competitors
• Overall impact (on profits) depends on the
institutional quality (measured in the terms of
corruption)
BEEPS 2012
• 4220 Russian firms from 37 regions
– Land ownership – 974 firms
– No land ownership – 2518 firms
Number of
observations
Mean
St. dev.
Min
Max
Number of
employees
4211
68.77
330.85
4
11000
Number of
competitors
2436
9.78
12.56
0
100
Distribution of Firms by Region
140
120
100
80
60
40
20
0
Distribution of Firms by Industry
2500
2000
1500
1000
500
0
Services
Manufacturing
Retail
Institutional Measurement
• Regional index of corruption
– Baranov, Malkov, Polishchuk, Rochlitz, Syunyaev
(2015)
– Uncorrelated indices of centralized and
decentralized corruption
• Factor analysis (BEEPS 2012)
• Regional index of centralized corruption
– Average size of “cuts” for state contracts
– Average size of bribes to government officials
Access to Finance
Access to finance as an obstacle (0–4 scale)
Share of land owned by the firm
-0.000851*
(0.000455)
(Log) number of employees
-0.000876*
(0.000480)
-0.000897*
(0.000486)
-0.000946*
(0.000493)
-0.000661
(0.000501)
-0.000688
(0.000508)
0.001882
(0.015931)
0.000065
(0.016916)
-0.017459
(0.017744)
0.002260
(0.017317)
-0.016909
(0.018151)
0.012150
(0.026992)
0.017620
(0.027463)
0.009704
(0.027728)
0.012801
(0.028181)
(Log) years since establishment
Sector fixed effects
No
No
No
Yes
No
Yes
Regional fixed effects
No
No
No
No
Yes
Yes
N
3384
3378
3344
3344
3344
3344
Pseudo R2
0.0004
0.0004
0.0004
0.0067
0.0284
0.0350
Land Ownership and
Payment for Security
Payment for security (1 – yes, 0 – no)
Share of land owned
by the firm
0.006509***
(0.000592)
(Log) number of
employees
0.004231***
(2.561)
0.004097***
(0.000635)
0.003640**
(0.000647)
0.004436***
(0.000665)
0.003947***
(0.000676)
0.311492***
(0.021997)
0.293221***
(0.022973)
0.325677***
(0.024408)
0.306428***
(0.023892)
0.335947***
(0.025370)
0.096396***
(0.033474)
0.089387***
(0.034347)
0.126688***
(0.034893)
0.120463***
(0.035745)
(Log) years since
establishment
Sector fixed effects
No
No
No
Yes
No
Yes
Regional fixed effects
No
No
No
No
Yes
Yes
N
3473
3465
3430
3419
3430
3419
Pseudo R2
0.0298
0.0809
0.0828
0.1068
0.1287
0.1492
Overall Impact
Profit
Share of land owned by
the firm
5394518***
(1241199)
Corruption
5407004***
(1240942)
5194789***
(1245187)
1341201
(1292630)
1338478
(1310034)
1189325
(1331973)
-7.70•107
(5.55•107)
-1.23•107
(6.52•107)
-0.78•107
(6.39•107)
-0.63•107
(6.44•107)
0.35•107
(6.49•107)
-2481522*
(1310576)
-2491196*
(1284561)
-2459980*
(1296871)
-2849548**
(1313289)
3.81•108***
(4.21•107)
3.81•108***
(4.53•107)
3.83•108***
(4.76•107)
5720782
(7.37•107)
1.55•107
(7.49•107)
Corruption 
Share of land owned by
the firm
(Log) number of
employees
(Log) years since
establishment
Sector fixed effects
No
No
No
No
No
Yes
N
1981
1981
1981
1981
1972
1972
Adj. R2
0.0090
0.0094
0.0107
0.0496
0.0488
0.0503
Main Findings
• The impact of land ownership is as not
straightforward as de Soto theory predicts
• Land ownership in Russia is associated with
positive and negative consequences
– Indeed, land ownership provides better access to
finance (as in Karas, Pyle, Schoors, 2015)
– Land ownership is associated with more spending on
security
• Overall effect depends on the institutional quality
Further Research
• Data on timing of land privatization
• Why did firms decide to privatize land?
– State of affairs in a region
– State of affairs in a firm
• How does land ownership affect innovations?
• Etc.