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New Institutional Economics: Implications for Rural Development Research and

Extension Programs

James N. Barnes, Ph.D.Assistant Professor of Rural Development

Department of Agricultural EconomicsOklahoma State University

405.744.9825barjn@okstate.edu

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The Journey Ahead

►What Is New Institutional Economics (NIE)?

►NIE and Theories of the Firm

►Implications for Rural Development Research

►Implications for Rural Development Extension Programs

►Concluding Remarks

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New Institutional Economics: Some Attributes

Klein (2000, p. 1) has defined NIE as: “…an interdisciplinary enterprise combining economics, law, organization theory, political science, sociology and anthropology to understand the institutions of social, political and commercial life.”

NIE can be broadly divided into the study of the institutional environment and institutional arrangements given positive transaction costs.

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NIE is similar to ‘Institutional Economics’ (Veblen, Commons)

NIE is dissimilar to ‘Neoclassical Economics’

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New Institutional Economics: Origins

Core focus is to understand how transaction costs shape both institutional environment and institutional arrangements/contracts/governance structures.

► Finally, policy analysis should be guided by ‘comparative institutional analysis’ (Coase, 1964)

The emphasis in the NIE on positive transaction costs derives from the work of Coase (1937; 1960) (Eggertsson, 1990).

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Contemplation of an optimal system may provide techniques of analysis that would otherwise have been missed and, in certain special cases, it may go far to providing a solution. But in general its influence has been pernicious. It has directed economists attention away from the main question, which is how alternative arrangements will actually work in practice. It has led economists to derive conclusions for economic policy from a study of an abstract of a market situation. (Coase, 1945, p. 195)

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New Institutional Economics: An Overview

Baumol (1952)Tobin (1956)

How does the institutional environmentaffect economic outcomes and wealth? (e.g. questions of economic efficiency)

How does the institutional environment affect institutional arrangements

(e.g. contract structure)

How do institutional environments emerge and evolve through time?

(e.g. political institutions featured)

Level One Level Two Level Three

SCIENCE OF CHOICE

SCIENCEOF CONTRACT

SCIENCEOF CONTRACT

Neoclassical

Posner (1986)Cooter and Ulen (1988)

Law andEconomics

Other

InstitutionalEnvironment

Institutional Arrangements

•Legal environment;• Norms and social conventions;• Economic history and economic growth;• Positive political theory; and• Complexity and cognitive science

•Neoclassical•Coasian•Moral hazard and agency•Transaction cost economics•CapabilitiesSources:Eggertsson (1990), Alston (1996), Klein (2000),

Allen (2000), and Williamson (2002)

NIEInstitutional Environment(Klein, 2000)

Economics ofRegulation

SCIENCE OF CHOICE

SCIENCEOF CONTRACT

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Transaction Cost Economics (TCE)

► Williamson’s (1975; 1985; 1991) TCE has been called the ‘make-or-buy’ or ‘outsource’ framework; it has been used to study vertical integration

► Two behavioral assumptions are important

► Transaction is the unit of analysis and has three attributes

► Asset specificity and the TCE approach defined

► Five types of asset specificity exist: site, physical, human, dedicated and temporal

► Empirical tests of the TCE hypothesis

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NIE and Theories of the Firm

Bounded rationality and opportunism

Maladaptation due to shirking

Transaction

Ex post

No

Yes

VI/Internal organization

preferred when investments are

relationship specific

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Behavioral Assumptions

Types of Costs

Unit of Analysis

Incentive Alignment

Ownership andControl Separate?

Vertical Boundary?

OrganizationHypothesis

Empirical Rank

TCE Agency Property Rights Coase (1937)

Bounded rationality and opportunism

Monitoring and shirking

Contract

Ex ante

Yes

No

VI/Internal organization

preferred as value of residual control

increases

2

Bounded rationality and opportunism

Bargaining over control of asset

Transaction/asset

Ex ante

No

Yes

VI/Internal organization

preferred as value of excludable rights

over asset increases

2

Bounded rationality ?

Search, bargaining, enforcement

Transaction

Ex ante, perhaps

No

Yes

VI/Internal organization

preferred for similar transactions

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NIE and Future Research: Some Examples in Rural Health

► A simple mathematical/empirical approach

Pi = αEi + β́Xi + ui,

- Pi is the performance level of rural hospital i; - Ei is a dummy variable indicating whether a rural hospital is “within” or “without” group; - α is an estimated coefficient measuring the effect of some treatment on performance of a rural hospital; - β is a vector of parameters; and- ui is an error term.

Some possible organization ‘treatment effects’ for empirical research►

Ei would be whether a rural hospital ‘outsources’ for physician services; and Ei would be negative indicating outsourcing adversely affects performance

TCE

Ei would be a board characteristic (e.g. length of term, board turnover, sizeof board);

Agency

Policy Ei would be implementation of a health care regulation

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NIE and Rural Development: Some Ideas for Extension Programs

► Board training for rural community organizations: “Healthy Boards”

Training modules on board governance and management, ethics in business, strategic and performance management, and team building tools

Rural hospitals;Agricultural cooperatives;Rural water districts;Community health centers;Livestock/fair boards;Economic development boards; andPublic school boards

National Association of Community Health CentersOklahoma Primary Care AssociationOklahoma Rural Health AssociationOklahoma Rural Health Research and Policy CenterOklahoma Rural Water AssociationOklahoma State School Board Association

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Network partnerships:

Target audiences:

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Concluding Remarks

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It is harvest time

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It is time to design extension programs using NIE principles of organization

It is time for action; more agricultural economists are needed

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Questions?

James N. Barnes, Ph.D.Assistant Professor of Rural Development

Department of Agricultural EconomicsOklahoma State University

405.744.9825barjn@okstate.edu