| This thesis examines how the institutional structure of government affects economic growth, levels of local public goods provision, predatory governmental regulation, and decisions of firms to operate in unofficial economy (chapters 1 and 2). Chapter 3 investigates the limits of arbitrage in flattening demand curves for stocks.; Chapter 1 examines the consequences of fiscal inter-governmental relations for the incentives of local governments to provide public goods. Based on a data set on Russian city budgets, it is shown that the existing revenue sharing schemes between regional and local governments provide local governments with no fiscal incentive to increase tax base and foster growth of businesses. The main result is that in Russia any change in a local government's own revenues is offset by changes in shared revenues. Evidence is provided that local governments' fiscal incentives are an important determinant of (1) the formation of private businesses, (2) the composition of public spending, and (3) the efficiency of public goods provision. These findings help to understand why Russia has grown more slowly compared to other transition countries. In contrast to Russian federalism, fiscal incentives in China reputedly are very strong.; Chapter 2 investigates effects of predatory regulation by the government for decisions of businesses to operate in the unofficial economy and hire private protection rackets. Based on a survey of shopkeepers in three cities in Russia, it is shown that higher level of regulation and lower levels of public goods provision are associated with a higher probability of contact with a private protection organization. Shopkeepers view private protection rackets as a substitute for state-provided police protection and state-provided courts. The results presented in chapters 1 and 2 emphasize the importance of public sector reform as a component of economic reform.; Chapter 3 examines the reasons why demand curves for stocks slope down. Most stocks have significant arbitrage risk: The risk of the arbitrage portfolio that holds {dollar}1 long in the stock and {dollar}1 short in its closest substitute is often substantial. Arbitrage risk deters risk averse arbitrageurs from flattening aggregate demand curves for stocks at efficient prices. Consistent with this theory, high arbitrage risk stocks experience higher price jumps upon inclusion into the S&P 500 Index—events which represent outward shifts of the added stocks' demand curves over their vertical supply curves. |
