INCENTIVE MECHANISM FOR PERFORMANCE-BASED PAYMENT OF INFRASTRUCTURE PPP PROJECTS: COUPLING OF REPUTATION AND RATCHET EFFECTS

The performance-based payment PPP model has been widely used in the infrastructure projects. However, the ratchet effect derived from performance-based reputation incentives has been largely overlooked. To overcome this shortcoming, ratchet effect is considered in the performance-based payment incentive process. A multi-period dynamic incentive mechanism is developed by coupling the reputation and ratchet effect. The main results show that: (1) Under the coupling of reputation and ratchet effects, the optimal incentive coefficient in the last performance assessment period is always greater than that of the first period. The bargaining power can replace part of the incentive effect; (2) Due to the ratchet effect, if the government improve performance targets through performance adjustment coefficients, it needs to increase incentives to overcome the decreasing effort of the private sector; (3) When the bargaining power and punishment coefficient are small, the reputation incentive is replacing the explicit incentive. The increasing incentive coefficient would make the ratchet effect dominant the reputation effect; (4) To prevent the incentive incompatibility derived from the ratchet effect, the government should increase the incentive while increasing the punishment to achieve the “penalties and rewards”. This study provides theoretical and methodological guidance to design incentive contracts for infrastructure PPP projects.

COMPETITION AND RATCHET HYPOTHESIS: HOW SAFE ARE MANUFACTURING COMPANIES IN SUB-SAHARAN AFRICA?

This study applied the conventional ratcheting notion that managers (agents) chose to restrict their performance because they anticipated that firms (principals) would respond to higher performance levels by raising targets or by cutting pay in a piece-rate labour environment. A cross-sectional panel model was developed to subject this baseline notion of ratcheting hypothesis to multi-period and ex-post competitive labour market environment, bearing in mind that there was information asymmetry to both parties. It was observed, as predicted by the theoretical model that there would be substantial ratchet effects in the absence of competition. However, when subjected to ex-post competition, the ratchet effects were reduced, regardless of whether market conditions favoured the firms or the managers and thereby making the manufacturing companies in Sub-Saharan Africa safer than when they were exposed to ratcheting in its conventional form.

An Empirical Examination of Relative Income Hypothesis: Evidence from Pakistan

The present study empirically investigates the relevance of the various specifications of relative Income hypothesis (RIH) in the case of Pakistan. World Development Indicators’ data is analyzed over the period of 1986 to 2016. This study tests the existence of income, consumption, and habit ratchet effects at the National level. Based on stationarity tests the techniques of Box Jenkin, Two Stage Least Square, Generalized Methods of Moments, and Limited Information Maximum Likelihood Method are utilized to estimate the four versions of relative income hypothesis. Findings of this research validate the significant prevalence of three types of ratchet effects in case of Pakistan. In Duesenberry-Eckstein-Formm (DEF) model, habit ratchet effect is found to be stronger than income ratchet effect. Whereas in modified Davis model Consumption ratchet effect exceeds the habit ratchet effect. It is observed that long run marginal propensities to consume are closer to one which demonstrates smooth consumption behavior over long period in Pakistan. The estimated short run marginal propensities to consume are observed to be less than long run marginal propensities to consume that accords with the existing consumption theory. These findings imply that all ratchet effects put pressure upon consumers to maintain the highest standard of living enjoyed in the past. In this process households do not retain balance between savings and consumption. Based on these findings, it is suggested to consider the impact of societal factor in formulating policies to shape the consumption patterns.

Keeping up with the Joneses: the Relevance of Duesenberry’s Relative Income Hypothesis in Ethiopia

Although it was mysteriously neglected and displaced by the mainstream consumption theories, the Duesenberry’s relative income hypothesis seems quite relevant to the modern societies where individuals are increasingly obsessed with their social status. Accordingly, this study aims to investigate the relevance of Duesenberry’s demonstration and ratchet effects in Ethiopia using a quarterly data from 1999/2000Q1-2018/19Q4. To this end, two specifications of relative income hypothesis are estimated using Autoregressive Distributed Lag (ARDL) regression model. The results confirm a backward-J shaped demonstration effect. This implies that an increase in relative income induces a steeper reduction in Average Propensity to consume (APC) at lower income groups (the demonstration effect is stronger for lower income households). The results also support the ratchet effect, indicating the importance of past consumption habits for current consumption decisions. In resolving the consumption puzzle, the presence of demonstration and ratchet effects reflects a stable APC in the long-run. Hence, consumption-related policies should be carefully designed as polices aimed at boosting aggregate demand can motivate low income households to gallop into wasteful competition so as to ‘keep up with the Joneses’—the relative riches.

Can Disintegration Be Democratic? The European Union Between Legitimate Change and Regression

While the emerging debate about the disintegration of the European Union focuses on descriptive and explanatory questions, this article approaches the phenomenon from the perspective of democratic theory. Building on a concept of disintegration as a form of constitutional politics that includes various possibilities of dismantling supranational polities, I argue that disintegration gives rise to a democratic puzzle. While it must be possible, for democratic reasons, to partially or entirely reverse European integration, any such step threatens the European Union’s democratic achievements. Disintegration seems to be caught between legitimate change and regression. To address this democratic puzzle, I examine to what extent European integration has produced democracy-related ‘ratchet effects’ that limit the scope for legitimate reversal. This analysis leads to three principles of legitimate disintegration that can be applied to any supranational polity and have important implications for the post-Brexit relations between the United Kingdom and the European Union.