Nobel Prize-Winner F. A. Hayek on the "miracle" of the Price System

NOBEL PRIZE-WINNER F. A. HAYEK ON THE "MIRACLE" OF THE PRICE SYSTEM

In classic market exchange, traders own the resources and bear the full wealth effects of their actions (there are no agency problems). In firms, decision makers act on the behalf of others and do not necessarily have strong incentives to maximize value. Hence decentralizing decision rights to employees will not always improve efficiency, even if these employees have better knowledge to make the decisions.

PROPERTY RIGHT SECURITY IN RUSSIAN DEPRIVATIZATION

1. Managers will be reluctant to make longer-term investments if they think there is a high probability that the company will be deprivatized. In calculating the value of this investment they must consider the increased possibility that the gains will go to someone else. Short-term investments, where the gains are realized more quickly and can be paid out to the owners (e.g., in dividends), would be affected somewhat less.

2. Foreign investment is likely to decline with an increased threat of deprivatization. The threat of losing the investment by this governmental action reduces the expected benefits of the investment.

3. Probably not. There will be some immediate transfer of wealth from foreign business to some Russian citizens and the government. However, the long run implications of reduced foreign and company investment is likely to be quite costly.

4. Russian politicians/bureaucrats might gain on the sales of the companies, which provide additional resources to be controlled by governmental bureaucrats. The Soviet-era managers might also gain if they obtain the company at a below-market price. Foreign owners, current managers, and the Russian people (who lose from reduced investment, jobs, etc.) are likely to be hurt.

5. Government officials have incentives to take actions that benefit themselves. To the extent that these officials get additional resources, votes, side payments (from the new buyers), etc., they may support actions that hurt the general population. (The general population, for example, does not have enough information or individual incentives to hurt the officials [e.g., by forming a coalition to get someone else elected].) These issues are examined in detail in Web Chapter 20.

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SHAREHOLDER VALUE AND MARKET EFFICIENCY

1. The market value is likely to be variable over the life of the bond. The cash flows are fixed. The market value of the bond is equal to the discounted value of the cash flows. This value will change over time as interests rates change. It is highly unlikely that market interest rates will be constant over the life of a 10-year bond. Increases (decreases) in market interest

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