Limited Horizons and the Persistence of Collective Farms in Post-Soviet Agriculture

Transcription

1 Limited Hoizons and the Pesistence of Collective Fams in Post-Soviet Agicultue Matin Petick Leibniz Institute of Agicultual Development in Cental and Easten Euope (IAMO), Halle (Saale), Gemany and Michael R. Cate Depatment of Agicultual and Applied Economics, Univesity of Wisconsin-Madison, USA Abstact May 2007 Agicultual tansition in the fome Soviet Union has, supisingly fo many obseves, not led to a widespead adoption of individual faming. This aticle attempts to undestand some peviously neglected foces behind this outcome. It develops a theoetical model of fam estuctuing in which manages exploit the pefeences of wokes fo confomity within a social efeence goup to cement thei own powe. The model povides a ationale fo the pesistent suppot among wokes and manages to the statusquo oganisation, despite the availability of a moe efficient individual faming option. Based on empiical evidence, we ague that manages have an incentive to keep hoizons of wokes limited by shelteing them fom po-efom influences. Pola efom equilibia ae geneated that ae consistent with the obseved spatial pattens of estuctuing. The model pedicts that policies aiming at the establishment of independent fams will fail unless they induce a big push in efom attitudes among wokes. Keywods Agicultual tansition; fome Soviet Union; social inteaction effects; fam estuctuing. JEL classification D23; O18; P32; Q15. Acknowledgements The authos ae gateful to Heinz Hockmann, Andey Nedoboovskyy, Ebehad Schulze, and semina paticipants in Belin, Halle and Madison fo helpful comments. The usual disclaime applies. Financial suppot by Deutsche Foschungsgemeinschaft (DFG) is gatefully acknowledged. petick@iamo.de; Phone: ; Fax:

2 2 1 Intoduction Afte one and a half decades of agicultual tansition in the fome Soviet Union, economists continue to be puzzled by the lack of change in faming oganisation in all but a few successo counties. The pesistence of lage fams is paticulaly outstanding in Ukaine and Russia. Although entusted with fomal popety ights in land and assets, agicultual wokes as the new ownes seem to be quite hesitant to establish smalle family fams. Due to thei pevalence in most maket economies, these have commonly been egaded as a bluepint fo fam estuctuing (Koeste 2005). Howeve, as Leman et al. (2004, 123) note in a ecent monogaph on the state of agicultual tansition in this egion, The ovewhelming majoity of fam wokes in Russia, Ukaine, and Moldova pefe to keep thei land and asset shaes in the fome collective, which in the meantime has eegisted as a copoate fam with a new maket-sounding name. They waive thei ight of exit, at least fo the time being, and pool thei esouces to ceate a copoate stuctue. A common explanation fo this absence of change has been that exit costs fo individual wokes ae too high, because they lack the physical and human esouces to take the isk of unning a business on thei own, and because up- and downsteam makets ae still lagely geaed to lage collective successo fams (See Mathijs and Swinnen 1998 and Rizov 2003 fo expositions of these aguments). Thee is no doubt that lacking esouces and pevasive maket impefections ae majo efom obstacles. Howeve, this explanation emains unsatisfying o at least incomplete because it is unable to deal with a numbe of obsevations that have been made in the couse of tansition. Fist, why is it that not only the manages of lage fams, but also the goup of agicultual wokes appaently stand united to oppose the establishment of smalle pivate fams in those counties whee efom is stagnating? Koeste (2005, 109) summaises the attitude of manages as follows: Manages wee used to feeling socially esponsible fo the employees on the fam. [They] believe in a specific ole of the state, namely to accept social esponsibility fo the suvival of the lage fams. With egad to fam wokes, Leman et al. (2004, 158) epot that: Only 6-7% of espondents in household suveys in Russia and Ukaine indicate that they would like to exit the fam entepise with thei shae of land and assets and establish a pivate fam. Nealy half the espondents in Ukaine (47%) ae even opposed in pinciple to the ight of exit with land and asset shaes, although this ight is potected by existing laws. Second, why is it that local up- and downsteam makets do not develop to bette seve the needs of small fames? If family fams ae a supeio mode of oganisation, economic incentives exist to ovecome pevailing maket impefections. An explanation is hence equied why individual entepeneus do not emege to set up a moe favouable business envionment fo pivate fames, as it does exist in most Westen economies. Thid, why do we obseve such a stiking duality in efom pattens acoss the Commonwealth of Independent States (CIS)? Wheeas lage fam stuctues emained moe o less untouched in Ukaine, Russia, Belaus and the Cental Asian epublics, thee has been a complete dismantling of collectives and a fa-eaching individualization of agicultue in the Baltics and the Tans-Caucasian counties Amenia, Azebaijan and Geogia (Rozelle and Swinnen 2004). It seems that esouce endowments and maket failues

3 3 ae mattes of degee, so that moe evenly distibuted efom outcomes acoss counties and egions would have been expected. This pape offes an altenative explanation fo the pesistence of pe-efom faming stuctues in the CIS counties that is consistent with these obsevations. It is based on the agument that copoate fam manages exploit the tendency of wokes fo confomity within the collective to cement thei own powe. Building on commonplace obsevation and theoies of social psychology, we ague that fam wokes have pefeences fo behaving in confomity with pees. We then assume that fam manages benefit fom the pe-efom status quo, because it assues them access to income, local powe and pestige. These manages may find it expedient to manipulate thei wokes in a way that they eject any oganisational change as being not confom with the nom. It is suggested that wokes eithe eceive monetay benefits in exchange fo behaving loyally to the manage, o manages may actively keep the hoizon of fam wokes limited. They do this by withholding infomation concening pivatisation ights, peventing political oganisation, not allowing outsides to invade the village o stat businesses with defecting wokes, and by stessing the necessity of collective solutions to poblems. By modifying a famewok due to Schaffne (1995), these aguments ae fomalised and thei theoetical implications deived. It is shown that fam manages have an incentive to employ wokes that ae loyal to them and to alienate outsides who might undemine this loyalty, and that they may be willing to sacifice fam pofits fo benefits that aise fom keeping the pe-efom stuctues. Wokes in tun may find the status-quo oganisation of agicultue just nomal and theeby pepetuate its existence, although a highe paying efom altenative exists. Whethe fam manages pay wokes highe wages to keep them loyal o whethe they sequeste them depends on the elative costs of both options, and a mixtue of both stategies may pevail in a given egion. A egional equilibium is deived in which eithe all copoate fams in a given aea emain intact o all fams ae dissolved. These implications ae shown to be lagely consistent with the evidence. The pape is oganised as follows. In the following section 2, we motivate ou appoach by summaising ecent evidence on social inteaction effects and authoity stuctues in post-soviet ual aeas. Section 3 pesents the fomal model. Sections 4 and 0 deive its implications with egad to loyalty elicitation stategies and the fomation of egional efom equilibia. In section 6, the model esults ae confonted with futhe empiical evidence. Section 7 concludes. 2 Goup confomity and patonage in the post-soviet countyside Intospection and casual empiics confim that a human tendency fo confomity is ubiquitous in eveyday life. It has its theoetical foundations in the social psychology liteatue and can be defined as the dependence of individual pefeences on the behaviou of a social efeence goup. Accoding to Aonson (1992, 13-33), confomity is einfoced if the majoity of the goup has an unanimous opinion, if the othe goup membes ae impotant and compaable to the individual, o if the individual feas social punishment by pees. Schaffne (1995, 249) hence agues that it is paticulaly stong in ual communities whee the individuals wok, kinship, social and eligious goups ae almost coincident. In addition, people have a tendency fo confomity if the envionment of the individual becomes inceasingly uncetain, so that the behaviou of othes

4 4 povides guidance on what is the ight thing to do (Aonson 1992, 28). In the tansitional context of fam estuctuing in the CIS, this is likely to be a elevant facto. It is theefoe not supising that a numbe of studies have found evidence in favou of deeply ooted pefeences fo goup confomity in ual aeas of the fome Soviet Union. The stong social consensus on the ules of the Russian village is descibed by Paxson (2002), who mentions the moal obligation to wok togethe and to help each othe in the village community; a geneally stong emphasis of ecipocity; and the esentment to cay out cash tansactions with a socially close individual. She also epots that the subodination of one s own will to that of the goup is a vitue explicitly endosed by villages. Of paticula impotance fo the moal economy of the Russian village seems a socially sanctioned, egalitaian wealth distibution (Paxson 2002). Haimson (1988) stesses how homogenous and self-contained peasant communities wee at the eve of collectivisation in the ealy twentieth centuy. This led to a stong efusal of the idea that land is teated as a commodity that could be sold to outsides of the community. Schulze (2002) cites a numbe of ecent polls which consistently show that the ual population ejects buying and selling of land. Acquiing land fo pesonal benefit is seen as conflicting with the nom (p. 314). Schulze agues that this attitude goes back to the taditional land commune obshchina, 1 and that it was pobably einfoced by the compaatively long peiod of collectivised agicultue in the Soviet Union. Schmemann (1997, 314) wites, based on expeiences in a cental Russian village: The communal mentality of the peevolutionay countyside was only stengthened by collectivization, and those peasants who stayed on the land stayed thee pecisely fo the sense of collective secuity offeed. To gab a lage piece of land fo oneself and to milk it fo money was to spit in the face of the collective and to lose its potection. These insights suggest that it may be a shotcoming to neglect the impotance of goupbased social noms and thei influence on individual decision-making in the post-soviet countyside. The hieachical authoity stuctues in post-soviet ual aeas ae anothe fact fequently mentioned in the liteatue. 2 In discussing the easons fo the lacking estuctuing of collective fams, Leman et al. (2004, 149) ague that: [A] facto that must not be ignoed is the taditional powe of the manage, both as an omniscient community leade who decides eveything in the village and as a epesentative of the outside authoities (egional o fedeal). In many instances, the manage execises influence to pevent deep estuctuing and peseve the lage-scale oganization as a way to keep his powe and his pequisites. Pesonal suvival is a behavioal facto that influences and motivates the decisions of manages in all copoations, and fam manages in tansition economies ae not an exception. 1 2 The obshchina o mi was a communal oganization based on joint owneship of land that emeged fom ancient tibal communities in ual Russia. As a special legal elationship between landlods, state and laboues, it had the powe of local juisdiction and peiodical land edistibution, accoding to family size. Membes wee collectively esponsible fo taxes levied against the obshchina. The system was pactised until the beginning of the Russian civil wa (see Paxson 2002; Schulze 2002 fo oveviews). An ealy aticulation of the idea that emeging pivate fames theat the local powe of established fam chaipesons who theefoe might stee the efom pocess accoding to thei own inteest is Van Atta (1993). Moe ecently, Valentinov and Nedobovsky (2005) have eaffimed this point fo Ukaine.

5 5 In an in-depth study of two ual egions in Ukaine and Russia, Allina-Pisano (2002) finds that these tendencies have been einfoced duing the tansition peiod (pp ): Declines in poduction meant that many of the lines of intedependence that suppot household and entepise economies became lines of mee dependence. The flexible quid po quo came to esemble a pecaious entitlement system that equies wokes to be on good tems with manages as much as possible at all times. With his contol of inputs fo household poduction, his connections with distict administation, his ability to conduct infomal lage-scale tansactions fo fuel, suga, and othe commodities on behalf of the entepise, the chaiman of a fam liteally holds the fate of its wokes in his hands. As evey village leans, it s bette to keep silent o say yes si. She concludes (p. 314): Fam manages and distict administatos as gatekeepes to the execise of entepise membes owneship ights gained de facto owneship of land and with it, the autonomy and economic incentive to pesist in thei new oles as leades in a quasi-feudal system. In Allina-Pisano (2004, 501-7), the autho descibes how chaimen of collective fam successos and othe local authoities wee intimidating those who left to set up thei own pivate fam. Appaently common haassment pactices included attempts to tun public opinion against pivate faming by launching citical aticles in the local pess, publicly belie it as something stange, suspicious and wothy of idicule, up to acts of open violence against family membes of pivate fames. Futhemoe, it is shown how authoities used the notion of the stange and outside as an instument to dive a wedge between the (loyal) ual population and pivate fames. The fact that many of these independent fames emeged fom maginal goups of the ual society, such as single women o membes of ethnic minoities, was publicly denounced, and epesentatives wee insulted and called Gypsies. Thee ae hence vaious ways in which social and political pessue is exeted to foce villages into a behaviou that is suppotive of the goals of local authoities. Dependence on the latte cowes people into what is quite ational political passivity in the cicumstances, as Humphey (2002, 155) notes. Building on these obsevations of local powe stuctues, we examine thei inteaction with the commonly obseved tendency among villages to behave in confomity with thei pees, which makes it paticulaly easy fo the fam chaipeson o manage to manipulate his o he wokes. 3 A model of manage-induced oganizational stability in post-soviet agicultue Ou model fomalises the idea that copoate fam manages exploit the tendency of wokes fo confomity within the collective to cement thei own position and powe. It has been inspied by an appoach due to Schaffne (1995), who analyses the stability of sevility aangements in feudal, pe-capitalist agicultue. Schaffne agues that if wokes pefe to do what thei pee wokes do, fames of lage estates may have an incentive to limit the day-to-day contact between thei own labou foce and non-sevile wokes in ode to ceate a sevility cultue on the fam. She thus intoduced the notion of keeping the hoizons limited as a stategy to secue powe elations within an administative hieachy. We adopt this idea and apply it to post-soviet agicultue which, accoding to seveal authos mentioned in the pevious section, displays a numbe of paallels to feudal agicultual systems. In contast to Schaffne, and moe in line with

6 6 eality, we focus on a one-tie labou maket and do not model altenative wage contacts. Instead, we intoduce the possibility that fam wokes may leave the collective and set up thei own individual fam. In addition, to keep the model simple, we abstact fom enfocement poblems elated to labou effot on the collective fam. 3.1 Individual vs. social utility Despite its intuitive plausibility, economists have only ecently paid inceasing attention to the fomal modelling of social inteaction effects (see Bock and Dulauf 2001 fo an oveview). A standad appoach has been to split the utility function into an individual and an additively sepaable social component. Futhemoe, it is commonly assumed that deviations fa fom goup aveage ae penalised moe stongly (Jones 1984). Given * a choice vaiable, λ 0, the esulting composite utility function, u, may then be epesented as follows: 2 ( g( λ) ) ( λ λ ) ) * u = u v, (1) 2 with individual utility (.), social utility v ( λ λ ). The function g(.) tansfoms λ into a utility-elevant magnitude, fo example income, and λ is aveage behaviou in the social efeence goup. Moeove, u', v' > 0. u ( ) As will be discussed in detail below, (1) fomalises the idea that individuals have pefeences fo confomity with thei pees, o doing what is the nomal thing to do in a given social efeence goup. Both inceasing positive o negative deviations fom goup aveage cause inceasing discomfot, but thee is no discomfot if eveybody in the goup behaves identically and chooses the same λ. As a esult, outcomes will likely be homogenous within a social efeence goup, but may be adically diffeent between goups. Jones (1984) and Schaffne (1995) intoduce a thid utility component into (1), accoding to which choice of a highe λ also has an intinsic disutility. While this may be plausible fo applications to wok effot and sevility sevices, we neglect this in the cuent application to wokes loyalty. A majo eason to model wokes as indiffeent to loyalty as such is that loyalty causes little physical effot and appeas much less pesonally humiliating than sevility as descibed by Schaffne. Unde ou assumption, howeve, it is individually less attactive to deviate fom goup noms. 3.2 Social efeence goups and the geogaphy of the model We distinguish two majo efeence goups that may influence the behaviou of villages, which we denote egional and national. The egional efeence goup is the community of people living in geogaphical poximity to the individual. We pagmatically identify this with the county o aion, which has been the lowe level of the two-tieed administative system thoughout the fome Soviet Union. In most ual egions of Ukaine and Russia, each collective fam foms the economic and social cente of a village, and a aion contains a dozen o so collective fams. Sociological field wok in ual Russia has shown that thee has been some mobility within localities, fo example because villages wee abandoned by the govenment and the population foced to elocate to neaby places. Howeve, most ual people spend thei entie life in a cetain aea, whee they ae suounded by thei elatives (O Bien et al. 2000, 95). People liv-

7 7 ing in a egion ae moe likely to meet in peson on a egula basis and hence fom a natual social efeence goup. 3 Social inteaction within this efeence goup, and infomation flow in paticula, is had to manipulate by local authoities. As a second efeence goup we posit a wide, potentially non-ual population that povides an altenative bluepint fo what is the ight thing to do and how to behave. With egad to de-collectivisation in agicultue, the mode of behaviou of this social efeence goup is codified in the national efom legislation, which gives an individual woke the ight to leave the collective and withdaw his/he assets. It is identified with a efom-oiented, uban majoity, and with family fams in Westen Euope o Noth Ameica, which ae pesented as a model fo agicultual estuctuing. In counties with a stong tadition of individualised faming pio to collectivisation, the membes of fome geneations may constitute pat of the efeence goup. Infomation about this social efeence goup is pimaily tansmitted via the media, though television o newspape, though tadition, but also via agents of change who ente a community, in village congegations, o by wod of mouth. 4 In contast to the naow efeence goup, inteaction with the wide efeence goup can assumedly be influenced by the local fam manage. He may o may not keep the hoizon of his wokes limited by withholding infomation concening pivatisation and othe civil ights, peventing political oganisation of fam wokes, not allowing outsides to invade the village, inhibiting the ceation of suppot netwoks o businesses fo pivate fames, fightening defectos, and stessing collective identity and local collective solutions to poblems. 5 The degee to which the manage keeps hoizons limited detemines how stongly fam wokes identify themselves with the wide, efom-minded efeence goup, as will be fomalised below. 3.3 Wokes and manages choice Fam wokes have pefeences, u, fo income, y, and additive pefeences, v, fo confomity with othe wokes in thei efeence goup. Thei income depends on a binay loyalty decision, λ. They may eithe stay on the local copoate fam, λ = 1, in which case they suppot the fam manage in local politics, e.g. voting fo him in the fam assembly, and do not exet thei ight in asset shaes of the fam. Loyal wokes eceive an In addition, many egions ae homogenous in ethnic tems, some of them officially ecognised as autonomous aeas subject to the ethno-teitoial pinciple of both the fome Soviet and the cuent Russian constitutions (Stadelbaue 1996, 42-49). In Russia, this efeence goup has been epesented by the efom-oiented Association of Peasant Fams and Agicultual Coopeatives of Russia (AKKOR). Accoding to Wegen (1995, 28-29), AK- KOR had a netwok of banches in evey oblast by the mid 1990s. Since its foundation it has held annual congesses and publishes an own weekly newspape, The Russian Fame. It suppots pivate popety and feedom of land use. Although its pimay constituents ae pivate peasant fames, it appeas to have moe suppot in uban than in ual aeas. Simila movements exist in othe CIS counties. Csaki and Leman (1997, 4) descibe how fam manages use infomation contol to keep hoizons limited: The beneficiaies in the land shaing pocess appea to be uninfomed concening the ights attached to thei land shaes. Thus, only 8% of espondents with shaes epot that it is allowed to sell land shaes. On the othe hand, most espondents (80%) know that they ae allowed to invest thei land shaes in the fam entepise, thus becoming shaeholdes of a new copoate entity The option of investing the shaes in the fam entepise is ecognized by almost all espondents because it has been epeatedly emphasized by fam manages, who ae appaently the main souce of infomation about land efom and who vey conveniently have omitted to mention the othe legally available options fo intenal estuctuing. Simila evidence is povided by Koeste (1999).

8 8 annual wage, w. Labou contacts can be enfoced costlessly by the copoate fam manage and thee is no othe employe in each fo fam wokes than the local copoate fam. Altenatively, wokes may choose to become independent fames and withdaw thei assets fom the copoate fam, λ = 0, in which case they eceive an income fom pivate faming, f ( λ ), whee λ the shae of loyal wokes in egion who have not taken up pivate faming and have loyally emained on the copoate fam. We assume that f '< 0 to captue vaious types of netwok extenalities, fo example the necessay political suppot fo estuctuing up- and downsteam makets fo pivate fames, and leaning pocesses and infomation spill-oves among efom oiented entepeneus to educe uncetainty and ambiguity in decision 6 making. It is assumed that fam wokes make compaisons among each othe with egad to how loyal they ae to the copoate fam management. An individual peceives the moe discomfot the stonge he/she deviates fom aveage goup behaviou in tems of loyalty, expessed by the shae of loyal wokes in the efeence goup, λ. Utility is assumed to decease with the composite tem ( λ λ ). Fo simplicity it is assumed that 2 both utility functions ae linea, hence u ', v' = const > 0. A fam manage allocates the labou foce of his fam, N, and othe assets to poduce composite fam evenue, by using a given technology. Copoate fam assets ae the sum of all individual asset shaes, and asset shaes can be withdawn by wokes if they wish. The manage is assumed to be the esidual claimant of fam pofit. 7 A manage theefoe benefits fom the loyalty of fam wokes, who suppot him politically, pepetuate the existence of the collective fam and thus secue his income and local powe. Although not modelled fomally hee, benefits fo the manage may also be of a psychological natue. 8 In the following, we focus only on the loyalty decision of wokes and simply assume that all othe poduction factos available to the manage ae allocated in a standad pofit-maximising way, hence geneating a goss pofit of Π fo the manage. Being awae of social efeence goup effects among his/he wokes, a manage can delibeately keep the hoizon of fam wokes limited by shelteing them fom the national efeence goup and by exeting explicit o implicit political and social pessue on them, as descibed above. Let θ = 1 if the manage actively keeps the hoizon of his loyal wokes limited and θ = 0 othewise, with θ [0..1]. Limiting the hoizon has an influence on which efeence goup fam wokes use to assess thei utility fom behaving loyally to the manage. If wokes hoizon is kept limited, they compae thei own behaviou with that of all othe wokes in the egion, λ = λ. If the hoizon is not kept While thee is now an established body of liteatue on economic netwok effects in agglomeation, only moe ecently has inteest inceased in how social inteactions foste the emegence of entepeneus in a given egion (see Minniti 2005 fo an oveview). Little is known about the emuneation of the coe management of copoate fams. Koeste (1999, 216) epots that many of the fam chaimen appea to enjoy a espectable living standad despite the poo economic situation of agicultue. It is hence assumed that they ae the de facto esidual claimants of pofits. Psychological benefits may aise because manages enjoy being the head of a commune (Amelina 2000, 503). The manage may also have a pefeence fo seeing agicultual poduction oganized in copoate fams. This could be the case if he/she has pofessional concens that the fam s dissolution will be economic mischief and lead to a food cisis (Koeste 2005, 109).

9 9 n limited, they compae thei behaviou with a wide, national efeence goup, λ = λ. The national efeence goup is assumed to be at least modeately efom-minded on aveage, so that λ < As a consequence, wokes who accept the wide social efe- n ence goup always expeience less discomfot fom choosing disloyalty than fom emaining loyal to the manage. It is assumed that λ is exogenous and can not be influ- n enced by decisions of individual fam wokes. By choosing θ, the mange detemines the elative weight of the two possible efeence goups of wokes: n λ = θλ + ( 1 θ ) λ. How costly it is to keep hoizons limited is given by a cost function C θ θ = C ( θ, R). Costs may aise fom own political activity of the manage to tun down efom-minded influences fom outside the egion, o bibes to public authoities who might stand up fo civil ights of wokes. This function depends on a vecto of egional chaacteistics, R, that includes the existence of consevative vs. efom-oiented political netwoks in a given egion, stength of collective vs. individual taditions, distance to uban centes, climatic and technological dimensions of agicultual poduction, θ etc (such diffeences ae discussed, e.g., by Amelina 2000). It is assumed that C > 0 1 θ and C > 0 11, implying that it is maginally costlie to achieve highe levels of shelteing. The suvival of the copoate fam in a given village depends on the ability of its manage to assue loyalty of a sufficient numbe of wokes in that village, subject to a budget constaint. The optimisation poblem fo a fam woke is hence: Max λ u w = u( y) v 2 ( λ λ ) ) subject to: w if λ = 1 y = f ( λ ) if λ = 0 (3) n λ = θλ + ( 1 θ ) λ. (4) The optimisation poblem fo a manage in village j in egion R is: Min C θ, w m θ = wn + C ( θ, R), (5) j subject to: θ Π C w (6) u w N j w ( λ = 1) u ( λ = 0) 0 whee constaint (6) defines the copoate fam s budget constaint and constaint (7) defines the loyalty paticipation constaint (heeafte denoted as the LPC). Both will be just binding unde optimising behaviou. Note that in the model copoate fam output only depends on etaining a loyal labou foce and the manage s task is simply to minimise the cost of keeping wokes loyal. Manages make decisions concening θ and w, to which wokes eact by choosing λ, accoding to the utility they deive fom behaving loyally o disloyally to the manage. Because the decision of a single woke not only depends on the manage s offe but (2) (7)

10 10 also on the behaviou of othe individuals in his/he social efeence goup, identical offes by manages may lead to diffeent wokes esponse in diffeent egions. This is analysed in futhe detail below. To summaise the intuition, wokes elative emuneation is, in two distinct ways, influenced by social inteaction effects. Fist, thee is a maket effect. The latte may be descibed as a netwok extenality o citical-mass phenomenon that influences the monetay etuns fom independent faming. The moe wokes tun into pivate fames, the easie it is, both economically and politically, to establish independent faming as an accepted oganisational mode. Second, thee is a psychological effect, accoding to which non-confomity with the efeence goup causes discomfot. These two effects may be usefully be analysed by focusing on the pola cases of λ = 1 (all wokes in the efeence goup ae loyal to the manage) and λ = 0 (nobody is loyal). In the fist case, switching fom λ = 0 to λ = 1 means making one s own behaviou confom with all the othes in the efeence goup, so that the disutility fom nonconfomity completely vanishes. In the second case, howeve, the woke switches into nonconfomity, and this may outweigh monetay benefits fom loyalty. Convesely, if most people in the efeence goup ae loyal to the manage, switching into disloyalty causes discomfot but yields the oppotunity to benefit fom pivate faming. In his/he loyalty decision, the woke thus weighs the utility fom wage payments o highe eanings fom pivate faming against the potential disutility fom non-confom behaviou. Which efeence goup is used to make this assessment can be influenced by the manage who may opt to keep the hoizons of his/he wokes limited. 4 Least-cost elicitation of loyalty We etun now to the manage s cost minimisation poblem. Recalling that we use LPC w w to denote the loyalty paticipation constaint ( LPC u ( λ = 1) u ( λ = 0) ), the minimizing the cost of loyalty elicitation yields the following fist-ode condition: m Cθ LPC θ m Cw = LPC which in the optimum state is equal to the maginal cost of secuing loyalty of wokes. This descibes how θ and w jointly contibute to ensue wokes loyalty and can also be witten as: w, m C w LPCw =. (8) m Cθ LPC θ The left hand side of (7) descibes an isocost cuve of secuing loyalty. The ight hand side descibes a loyalty indiffeence cuve, that is the locus of all θ, w combinations w w whee the joint effect of θ and w just suffices to make u ( λ = 1) as high as u ( λ = 0). Analysing the single components of the optimality condition allows us to be moe pecise with egad to the shape of the isocost and loyalty indiffeence cuves. Fom the definition of C in (5) follows that C w m m = N j = const, that is the costs of a maginal wage incease is detemined by the numbe of wokes. Futhemoe, given ou ealie as-

11 11 sumption about the costs of limiting the hoizon, C m = θ θ C1 > 0. The moe θ is used, the costlie is the maginal incease. The isocost cuve theefoe has a concave shape θ (Figue 1). The budget constaint (6) defines a maximum wage w max = ( Π C ) / N the manage is able to offe. It is detemined by the collective fam s poductivity, the extent to which hoizons ae actively limited and potential oppotunity costs of the manage (assumed zeo hencefoth). If thee is no limiting of hoizons, w max can be dawn into Figue 1 as shown, assuming that the solid cost cuve displays the manage s budget. w max then denotes the locus at which w = f fo a given λ if θ = 0, that is loyalty elicitation occus only though wage payments. 9 θ Because C is also dependent on egional chaacteistics, R, diffeent egions exhibit diffeent isocost cuves. The southeast shift shown in Figue 1 is induced by elatively inceasing costs of limiting the hoizon vis-à-vis the wage costs. Figue 1: Isocost cuves fo secuing the loyalty of wokes θ 1 dθ dw R 3 R 2 R 1 0 w max w Souce: authos figue. It is also possible to detemine the shape of the loyalty indiffeence cuve. To ease the n analysis, we assume that λ = 0. Unde this assumption and afte substituting (2) to (4) into the LPC, the latte becomes: LPC u( w) v((1 2 2 θλ ) ) u( f ) + v(( θλ ) ) = u( w) u( f ) v + 2 vθλ. The implicit function allows us to detemine the slope of loyalty indiffeence cuve as: dθ dw LPC u' w = =. LPCθ 2vλ Unde the assumption of constant maginal utility of income fo the loyal woke, this tem is a constant. The loyalty indiffeence cuve, within the [0..1] boundaies, is thus a 9 In actual pactice, a pat of the wage may be paid in-kind, including inputs and machiney access fo the woke s household plot and othe non-monetay benefits, such as discounted meals in the copoate fam s cafeteia o access to health sevices.

12 12 staight line that becomes steepe as λ deceases. In wods, how effective it is to keep hoizons limited in a given egion depends on how many wokes ae (still) loyal. Keeping hoizons limited is a pefect substitute fo inceasing wages, as long as thee ae loyal wokes in the egion and as long hoizons ae not yet fully limited. Both the isocost and loyalty indiffeence cuves may now be dawn into one figue, in which the tangency point satisfies the optimality condition (8) and thus detemines the optimal choice of θ and w fo secuing loyalty of wokes (Figue 2), denoted with asteisks. Note fist that, fo a given λ, diffeent isocost cuves in diffeent egions as displayed in Figue 1 would lead to vaying optimal elicitation stategies. Regional chaacteistics detemine how manages elicit loyalty and how costly it is. In egions whee politically influential manages cannot affod to pay highe wages, they will esot to a stategy of keeping hoizons limited in ode to secue the suvival of thei copoate fam. Figue 2: Refeence goup effects and the optimal choice of θ and w θ 1 θ* isoeffect isoeffect 1 λ < λ 2 2 λ 0 w* w max w Souce: authos figue. Futhemoe, Figue 2 shows the effects of changes in aveage efeence goup behaviou as captued by λ. A decease in aveage loyalty of the efeence goup has two effects, as shown by the move fom the highe λ to the smalle λ. Fist, the loyalty in- 2 1 diffeence cuve shifts out to the ight, because wokes need a highe compensation fo thei inceased disutility fom emaining loyal. Futhemoe, it becomes steepe because limiting of hoizons is now less effective and the wage equivalent to a given incease in θ shinks. As a esult, the manage needs a lage budget to keep wokes loyal; the new isocost cuve obeying the tangency condition lies futhe notheast. In addition, elatively less limiting of hoizons and highe wage payments will be in the least-cost solution of the manage. Note that the manage may have aleady exploited his maximum budget, denoted by w max on the hoizontal axis, so that it is no longe feasible to keep wokes loyal to the collective. This would indeed be the case in Figue 2.

13 13 5 Regional efom equilibium with social inteaction effects This section analyses how the inteaction between manages and wokes and among wokes dives efom choices in the model and shows how pola equilibia may be induced, with eithe all o no fam wokes loyal to copoate fam manages. To do this, we focus on a single geogaphic egion compised of identical copoate fams. We poceed in thee steps that ae illustated by the thee chats in Figue 3. Fist, we investigate the pue maket effect of social inteaction. Afte that, the psychological effect and the effect of limiting hoizons ae added.

14 14 Figue 3: Regional loyalty equilibium with diffeent social inteaction effects paticipation wage w (a) pue maket effect f w max w min 0 λ l 1 λ (b) maket and psychological effects without limited hoizons (θ = 0) w min λ ' (c) maket and psychological effects with limited hoizons (θ > 0) l θ* w max * w* λ * l ~ λ Souce: authos figue.

15 15 Figue 3 (a)-(c) display the wage wokes equie to emain loyal as a function of the egional shae of loyal wokes, λ. The solid line in each gaph hence denotes the pa- ticipation wage that assues that the LPC (7) is just binding. Figue 3 (a) assumes that thee is no social utility associated with loyalty o disloyalty (i.e., v = 0 ). The solid line shows the pue monetay o maket effect of each woke s loyalty decision, diven by the poductivity of pivate faming, f. It illustates how positive netwok extenalities fom establishing independent pivate fams lead to highe pay-offs if moe wokes choose disloyalty. Wage payments highe than f imply that wokes emain loyal, wheeas payments lowe than f lead wokes to withdaw. The tem wmin = f ( λ = 1) denotes the minimum wage the manage must offe if all wokes in the locale ae loyal. Note that this is the cicumstance when pivate faming Π is least poductive. The tem wmax = indicates the maximum wage that the manage N can affod to offe, given the poductivity of the collective fam. The intesection of w max with the solid f-line defines a egional lowe theshold of loyal wokes, λ. If λ falls below this lowe theshold, copoate faming will no longe be sustainable in the egion and the only institutional equilibium fo the egion will be complete agicultual pivatisation. We thus see the sense in which this model has a tipping point at λ l. At loyalty levels above λ, copoate faming will be etained. But once a citical mass of efom-minded l wokes is eached, the efom equilibium is self einfocing. Fo this eason, even though independent faming yields highe pay-offs, extenal foces, fo example an infomation campaign, may be necessay to each this equilibium. How likely it is that pivate fams emege depends on the location of λ l. The futhe this is on the left, the highe the pobability that collective fams emain intact. l We conside now what happens when we eintegate social utility in the model. Initially, we assume that hoizons ae not limited such that social noms ae set by the national level efeence goup, i.e., λ = λ n < Unde this assumption, wokes ae influenced by po-efom goups and feel uneasy about behaving loyally. As illustated in Figue 3 (b), the incopoation of social utility unde these assumptions esults in a paallel shift of the LPC to the notheast. Loyalty is now moe expensive to elicit, and the theshold point, λ, shifts to the ight. The ange ove which a egional loyalty equilibium obtains thus shinks, making it moe likely that the egion will shift to the full efom o pivatisation equilibium. While social effects thus ae a theat fo the existence of the collective fams (and hence the income base and powe of the manage), they also povide a mechanism that the manage can use to avet this fame theat (Van Atta 1993). In ou model, the manage can eithe make loyalty moe attactive by inceasing wages, o influence the social efeence goup of wokes by actively limiting thei hoizon. The latte effect is displayed in chat (c), whee we pemit the manage to choose θ to be geate than zeo. As analysed in the pevious section, the optimal θ inceases with λ. Fo illustative puposes, we e-daw the LPC in Figue 3 (c) holding θ fixed at the optimal level fo some elatively high level of λ. The solid line illustates those wage levels which just meet l

16 16 the LPC fo that fixed level of θ. Fo that given level of θ, the LPC will cut fom below the LPC fo the no social effects case. We now define a ~ λ as the citical value of n λ such that λ = θλ + ( 1 ) λ = At this ~ λ, the individual woke s disutility fom choosing eithe loyalty o disloyalty is just equal. Fo λ > ~ λ, manages can elicit loyalty by offeing a wage lowe than that equied to elicit loyalty in the absence of social effects. Fo λ < ~ λ, a highe wage must be paid to elicit loyalty. Howeve, this wage will still be weakly less than that equied to elicit loyalty when manages do not limit hoizons in the pesence of social effects. Finally, note that w max and the budget available to pay wages ( ) diminishes when manages choose θ > 0. But despite this Π C θ N offsetting effect, the capacity of the manage to limit hoizons will always shift the theshold loyalty level, λ l, e-expanding the ange ove which copoate faming can be sustained, as shown in Figue 3 (c). By changing the pay-offs, keeping the hoizons limited has anothe pofound effect on the egional equilibium which is vey much in the inteest of the manage: it establishes a second pola equilibium fo aveage egional loyalty levels to the ight of ~ λ. Once the majoity of wokes has decided to emain loyal, this pocess is self-einfocing, as indicated by the additional solid aow. By stessing the collective identity of wokes and keeping away any efom-minded attitudes fom villages, the manage can establish a stable equilibium that guaantees the existence of the collective fam. Because wokes feel comfotable with doing what is, in the community, the nomal thing to do, they have an incentive to choose loyalty if the majoity did so aleady. With egad to wokes pay-off, howeve, the pola loyalty equilibium as dawn in chat (c) is inefficient as compaed to the full de-collectivisation outcome. Even so, because limiting the hoizon shifts the theshold loyalty level λ l back to the left, it makes it even moe likely that a loyalty equilibium occus. 6 Testable implications and empiical evidence Given ou basic assumptions concening social inteaction effects among wokes and manages incentives to keep hoizons limited, the model povides a numbe of testable implications: 1. Within a pool of egions with compaable social and geogaphical chaacteistics, thee ae eithe egions which totally de-collectivise, so that thee ae no loyal fam wokes and a widespead establishment of pivate fams, o egions which keep collectives completely intact, so that thee ae only loyal fam wokes and a loyalty cultue pesists. Because only pola efom equilibia ae stable, thee will be no intemediate o mixed estuctuing outcomes, ceteis paibus. 2. Pesisting loyalty equilibia can only be ovecome if a sufficient numbe of wokes decide to leave the collective fam, utilise the netwok extenalities in pivate faming posited by the model and thus jump ove the citical lowe bound loyalty level. If manages keep hoizons limited, maginal impovements in the elative etuns to independent faming have no effect on wokes loyalty.

17 17 3. Depending on the elative costs of monetay incentives vis-à-vis limiting hoizons in a given locality, manages use diffeent mechanisms to elicit loyalty. Whee costs of sequesteing villages fom extenal influences ae lowe, manages will ceteis paibus educe wage levels and moe stongly keep hoizons limited. Whee keeping hoizons becomes exceedingly costly because widespead access to infomation and unambiguous efom policies ease coodination on a de-collectivisation equilibium, collective fams will dismantle unless manages ae able to offe highe wages. In this section, we pesent evidence that is consistent with these implications. Because thee has been little systematic eseach on the elevance of social inteaction effects in ou context, the esults ae tentative and moe detailed empiical teatments emain fo futue wok. 10 To ensue consistency with the efom choice as specified in the model, we focus on counties with edistibutive de-collectivisation policies, as opposed to counties that opted fo estitution to fome ownes (fo details see Leman et al. 2004, 85-93; Rozelle and Swinnen 2004, ). In a simplifying view, asset edistibution, at least fomally, povided a faily lage but well-defined goup of ual esidents the option to appopiate a shae of fomely socialised assets. It was pactised in all CIS counties and in some Cental Euopean counties, notably in Albania. Restitution, on the othe hand, esticted the goup of eligible ecipients and intoduced fome and possibly absentee ownes o thei heis as additional stakeholdes. This mode of estuctuing pevailed in most othe Euopean tansition counties. Howeve, the moe complex conflicts of inteest in asset estitution have not been incopoated in the model so fa. 6.1 Duality of efom outcomes in fome Soviet counties A fist piece of evidence that is boadly consistent with the hypothesis of pola decollectivisation esults comes fom a simple compaison of efom pattens in Table 1. All counties given in the table stated fom the Soviet model of lage-scale collective and state fams, which usually allowed individual faming only in the fom of subsidiay household plots. In the fist goup of counties given in the table, the ovewhelming shae of land was individualised aleady five yeas afte efoms had stated. 11 On the othe hand, fam estuctuing has been almost absent in all of the bigge successo counties, whee the shae of individual fams aely has passed the 20-pecent mak of total land use even ten yeas afte the stat of efoms. Moeove, a lage shae of this is epesented by the millions of attached household plots that aleady existed duing Soviet times, and it is unclea how much land has simply been abandoned An altenative would be to ely on mico data concening individual efom choices and diectly test the elevance of social inteaction effects econometically (Bock and Dulauf 2001; Fletschne and Cate 2007). The data equiements and methodological subtleties of such an appoach ae challenging, howeve. Also Geogian agicultue is lagely dominated by individual faming. Compaatively low figues in the table ae due to the fact that a consideable shae of land lies idle in fome state fams, which ceased to opeate duing the civil wa (Leman et al. 2004, 123).

18 18 Table 1: Shae of individual fams in total agicultual land of some fome socialist counties (pecent) Pe-efom 5 yeas afte stat of efoms 8-10 yeas* afte stat of efoms Examples fo de-collectivisation equilibia: Albania 3 95 n.a. Amenia Geogia Latvia Lithuania Examples fo loyalty equilibia: Belaus Russia Kazakhstan Moldova Ukaine * depending on data availability. Souce: Data compilation taken fom Rozelle and Swinnen (2004, 426). This boad compaison does not take into account the vaious diffeences in initial conditions which wee pesent despite a common Soviet heitage and which may have explanatoy powe fo efom outcomes. Fo example, Rozelle and Swinnen (2004, 439) ague that in counties with labou-intensive technologies, individualisation yielded substantial gains in technical efficiency and thus induced estuctuing. Howeve, in line with the theoetical implications of ou model, even in adjacent egions with simila poduction conditions, highly diffeent efom outcomes emeged. A fist example ae the ochad, vineyad and tobacco gowing egions of Tanscapathia, Moldova, the Cimea and pats of Caucasus. These continued to be cultivated by copoate fams in Ukaine and Moldova thoughout the 1990s, while a widespead pacellisation took place in the Tans-Caucasian Republics (see Kegel 1997 fo Geogia). A second examples is the Baltic daiying and pig eaing egion. This most westen egion of the Russian foest zone now coves Latvia, Lithuania, Belaus and Nothen Ukaine (Stadelbaue 1996, 481). Wheeas poduction is still dominated by collective fam successos in the latte two counties, individualisation has pogessed substantially in the Baltic counties (Meyes and Kazlauskiene 1998). 12 In addition, it would be desiable to have cases of vaying efom pattens within one of the newly emeged counties, which appeas to be most pomising in the land-ich counties such as Russia and Ukaine. Although thee ae cetain egional vaiations in tems 12 Contay to all othe counties listed in the table, Latvia and Lithuania implemented a efom appoach based on estitution to fome ownes. It seems plausible that a not too distant histoy of family faming o even the appeaance of claimants to individual fams that had been expopiated unde the Soviet egime makes limiting of hoizons vey costly and coodination on a de-collectivisation equilibium much moe likely.

19 19 of efom outcomes within these counties (see Caume 1994 fo Russia), the oveall pictue is one of widespead eluctance to become engaged in individual faming (in contast to household plot poduction). Howeve, Uzun (2005, 89) notes that even in Russia thee ae single islands of adical de-collectivisation: In Saatov Oblast, the agicultue in some disticts is totally individualized : all the copoate fams have been liquidated and thei land and assets have passed to peasant fames. This finding suppots ou hypothesis of pola equilibia and meits futhe eseach into its causes. 6.2 How de-collectivisation equilibia have emeged Moe diect evidence on the ole of individualisation examples and the emegence of a citical mass of disloyal wokes can again be deived fom the counties classified as displaying a de-collectivisation equilibium in Table 1. Unfotunately, the liteatue descibing de-collectivisation pocesses at the local level in these counties is vey scace. Howeve, the following examples povide some peliminay insights that suppot the implications of ou model. Kegel (1991) is an account of efom pocesses that took place in the last months of the then Geogian Socialist Soviet Republic (SSR). 13 At the outset, she notes the aboveaveage ole of household poduction in the Geogian SSR compaed to othe Soviet epublics. 14 She then descibes how, in August 1989, a decee by the Republic administation was issued accoding to which kolkhozes and sovkhozes should be liquidated and individual fams be intoduced in six aions of the Republic. Accoding to the autho, this was a move by the govenment to counteact the notoious inefficiencies in socialised food poduction of the Republic. Decisions on de-collectivisation wee to be made by majoity vote of the collective s geneal assembly. Contay to most of the late expeience in Russia and Ukaine, almost all collectives and state fams in the efom egions wee fomally dissolved by Januay 1, As a esult of delays in fomal land distibution, spontaneous pacellisation by single fam wokes occued in sping Kegel (1991) epots a locally stong demand fo land by fome wokes, as a esult of which hundeds of individual fams wee established in the efom egions. This efom patten exhibits a numbe of inteesting chaacteistics that ae consistent with ou model. Fist, the Geogian public was used to the fact that individual poduction was a majo food supplie in the Republic. Futhemoe, the powe of local fam diectos was held in check due to the still widely intact hieachy of the Geogian socialist govenment. Finally, spontaneous individualisation attempts povided the examples fo the majoity of ual dwelles to follow suit, which led to a complete beak-up of the fome collective stuctues. All this made it pohibitively costly o impossible to keep hoizons limited and led to the appaent move towads a de-collectivisation equilibium in these egions. A simila desciption is povided by Cungu and Swinnen (1997) fo Albania, whee people had a elatively fesh memoy of individual faming at the time of the collapse of the communist egime. Because the ultimate collectivisation wave had occued only in 1967, thee was still a boad suppot fo family fams as an oganisational mode. Com Geogia declaed independence fom the USSR on Apil 9, Between 1986 and 1988, household poduction contibuted on aveage about 47 pecent of goss agicultual output of the Geogian SSR. Fo the USSR in total this shae was only 26 pecent (Kegel 1991, 369, based on official statistics).