New Economics Papers
on Law and Economics
Issue of 2005‒02‒06
two papers chosen by
Jeong-Joon Lee, Towson University

  1. Royal Ahold: A Failure Of Corporate Governance By Jong, A. de; DeJong, D.V.; Mertens, G.; Roosenboom, P.
  2. Toward a Modern State in Chile: Institutions, Governance, and Market Regulation. By Eduardo Saavedra; Raimundo Soto

  1. By: Jong, A. de; DeJong, D.V.; Mertens, G.; Roosenboom, P. (Erasmus Research Institute of Management (ERIM), Erasmus University Rotterdam)
    Abstract: Royal Ahold (Koninklijke Ahold NV) was one of the major success stories in the 1990s and is one of the major failures in corporate governance, suffering a complete meltdown in 2003. This clinical study analyzes Ahold?s growth strategy through acquisitions and isolates the cause of the failed strategy, i.e. the absence of internal as well as external oversight of management?s strategy. This study details the consequences of the strategy: bad acquisitions, an accounting scandal and the loss of investor confidence. It illustrates how initially a family and later professional management exploited the intent of the law and existing regulatory structures to maintain absolute control of the company. It analyzes in detail the applicable governance mechanisms of Ahold that were designed to hold the self-interest of the parties in check. It asks the reader to consider whether these governance mechanisms, properly implemented, might have helped prevent Ahold or a situation similar to Ahold.
    Keywords: international economics;financial economics;law and economics;corporate governance;regulation;
    Date: 2005–01–25
  2. By: Eduardo Saavedra (ILADES-Georgetown University, Universidad Alberto Hurtado); Raimundo Soto (Departamento de Economía, Pontificia Universidad Católica de Chile)
    Abstract: Chile, as most Latin American countries, inherited the language, religion, and the institutions from 16th century Spanish conquerors. Most institutions have not changed since. This paper examines the institutional and economic structure of the State in Chile. It concludes that in several dimensions the current structure is incompatible with an adequate functioning of market economies, as those intended by the economic reforms implemented during the last three decades of the last century. The country needs to implement reforms in the administration of the State, the working of the Judiciary system, and the incentives and operation of regulatory agencies. Their combined negative effects imply that the benefits of reforms, privatization and market liberalization are partially dissipated in the form of inefficiency and rent seeking behaviour. In turn, this suggest that it is unlikely that the Chilean economy will reach the high growth rates necessary to overcome under development. Our main conclusion is that, in order to implement a framework in which the State acts mainly as regulator and competition supporter, it is necessary to undertake profound changes in the structure of incentives in which it currently operates. Five elements are at the center of this far-reaching evolution away from centralism, stagnation, and inefficiency: (1) the divestiture of state-owned enterprises, (2) the upgrade and update of regulatory agencies and the institutional framework in which they operate, (3) the improve of competition policy institutions, (4) the improvement of consumer rights protection, and (5) a substantial improvement in the working of the Judiciary system.
    Keywords: Modernization, Institutions, Regulation, Governance
    JEL: H11 K21 K23 L51 L97
    Date: 2004–12

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