The government's incentives to bail out inefficient projects are determined by the trade-off between political benefits and economic costs, the latter depending on the decentralization of government. Two effects of federalism are derived: First, fiscal competition among local governments under factor mobility increases the opportunity costs of bailout and thus serves as a commitment device (the "competition effect"). Second, monetary centralization, together with fiscal decentralization, induces a conflict of interests and thus may harden budget constraints and reduce inflation (the "checks and balance effect"). Our analysis is used to interpret China's recent experience of transition to a market economy.

We present a model of large-scale economic reforms, modeled on the transition process in Eastern Europe, with aggregate and individual uncertainty concerning the outcome of reforms. The government is assumed to choose the speed and sequencing of reforms. We compare big-bang strategies with gradualist reform packages. We show that (i) gradualist reform packages may be easier to get started, (ii) optimal sequencing of reforms should aim at creating constituencies for further reforms, and (iii) gradualism may generate a higher investment response because of a lower option value of waiting than would a big-bang approach.

October 1997, (Forthcoming, American Economic Review) The government's incentives to bail out inefficient projects are determined by the tradeoff between political benefits and economic costs, the latter depending on the decentralization of government. Two effects of federalism are derived: First, fiscal competition among local governments under factor mobility increases the opportunity costs of bailout and thus serves as a commitment device (the "competition effect"). Second, monetary centralization, together with fiscal decentralization, induces a conflict of interests and thus may harden budget constraints and reduce inflation (the "checks and balance effect"). Our analysis is used to interpret China's recent experience of transition to a market economy. (JEL E62, E63, H7, L30, P3) Key Words: Soft Budget Constraints, Federalism, Decentralization, Competition, China

We present empirical evidence that, among a variety of cultural dimensions, the individualism-collectivism dimension, based on Hofstede's (2001) data, is the most important and robustly significant effect of culture on long run growth. Other dimensions that have a significant effect, albeit less robust, are generally strongly correlated with individualism and convey similar information. We found no significant or robust effect on growth from cultural dimensions that are independent from the individualism-collectivism cleavage.

The authors present a model of large-scale economic reforms, modeled on the transition process in Eastern Europe, with aggregate and individual uncertainty concerning the outcome of reforms. The government is assumed to choose the speed and sequencing of reforms. The authors compare big-bang strategies with gradualist reform packages. They show that gradualist reform packages may be easier to get started, optimal sequencing of reforms should aim at creating constituencies for further reforms, and gradualism may generate a higher investment response because of a lower option value of waiting than would a big-bang approach.

It has been increasingly recognized that entrepreneurship plays a crucial role in successful economies. The Schumpeterian approach to growth (Aghion and Howitt, 1997) advances the view that entrepreneurial dynamism is the key to innovation and growth. A growing body of policy work emphasizes the important role of entrepreneurs in economic development (World Bank, 2003). Yet, research on entrepreneurship in economics is rather limited. There are three distinct perspectives on entrepreneurship in social sciences. The first perspective focuses on the role of economic, political, and legal institutions in fostering or restricting entrepreneurship. Institutional problems are seen in credit constraints that make it impossible to borrow and set up businesses; insecurity of property rights that provides insufficient incentives for entrepreneurs; and regulatory burdens that make setting up new enterprises difficult. The second perspective focuses on the sociological variables shaping entrepreneurship. For example, sociologists study the role of values and social networks in promoting or discouraging entrepreneurial activities. Social networks may work through a variety of channels, such as family, friends, or ethnic groups. The third perspective emphasizes individual characteristics of entrepreneurs. Psychologists have studied the traits associated with entrepreneurship such as a personal need for achievement, belief in the effect of personal effort on outcomes, attitudes towards risk, and individual self-confidence. Although there are studies on each perspective, little work looks at each of these factors taking the other into account. This is precisely what we do in this paper, using a new data set of Chinese entrepreneurs and a matching sample of non-entrepreneurs with similar age, gender, and educational characteristics. The survey covers both entrepreneurs and non-entrepreneurs in order to understand how they differ in individual characteristics, family background, social networks, values and beliefs, and perceptions of the institutional environment. The data further allow us to separate Chinese entrepreneurs into two groups, by necessity and by opportunity, and to differentiate non-entrepreneurs in three groups, those who never thought to be entrepreneurs, those who thought but never became entrepreneurs, and those who became entrepreneurs but eventually failed. This is a richer data set than a previous survey in Russia.