Introduction to Institutional Economics
-
Upload
munish-alagh -
Category
Documents
-
view
214 -
download
0
Transcript of Introduction to Institutional Economics
![Page 1: Introduction to Institutional Economics](https://reader031.fdocuments.in/reader031/viewer/2022021323/577cc0751a28aba711902d37/html5/thumbnails/1.jpg)
INTRODUCTION TO INSTITUTIONAL ECONOMICS
1. The Big Picture
Framework for analysis of connection between choice-coordinating institutions
and the performance of the economy. Alternatives range from the market with
alternative property and contract rules to government enterprise and commands.
Role of formal and informal institutions.
Property as Power an as Econo!i"ingInstitutions as constraints and as
enabling. How paradigms aect what you see! what you "uestion.
#ggertsson! $hrainn! #conomic %ehavior and Institutions. &1''()! *h. 1. Also see
Foreword and +reface.
,. Institutions # Organi"ations rgani/ations &0rms)! Institutions and
%oundaries
b. imon! H. rgani/ations and 2arkets! 3. #con. +erspectives! 45,4-66 &1''1).
&Available from 3$R)
c. Hodgson! 7. #volutionary 8 *ompetence-%ased $heories of the
Firm! Evolution and Institutions! &1''')! ,69-,94.
$% Institutiona& Change
a. :orth! ;. Institutions! Institutional *hange and #conomic +erformance! &1''()
b. %owles! *hs. 11-1< &optional! see study notes)
'% CAN (E PREDICT T)E CONSE*UENCES +PER,ORMANCE- O,
ALTERNATI.E INSTITUTIONS/
E0peri!enta& Econo!ics
.ernon S!ith won the :obel +ri/e for his work on e=perimental economics. In
his article! $heory! #=periment and #conomics! J. Of Economic Perspectives!
<&1)5 141->' &1'?') &3$R) he contrasts what can be learned in 0eld and
e=perimental tests@ n p. 146! he argues the advantage of e=periments over
0eld data. Are you convinced@
Institutions matter. 14> $his is the main message of these e=periments. $his
may e=plain why mith has attached the #conomic cience Association meetings
to those of the +ublic *hoice ociety.
mith suggests three parts to a theory so that it might be tested5 environment!
institution and behavior &14<). His conception of environment includes all agents
characteristics! and for him this is primarily preferences whose essence is
e=pressed in willingness to pay or accept. +references are 0=ed and not learned
in the conte=t of the game. ;oes this 0t what we know about how the brain
works@
![Page 2: Introduction to Institutional Economics](https://reader031.fdocuments.in/reader031/viewer/2022021323/577cc0751a28aba711902d37/html5/thumbnails/2.jpg)
His conception of institutions include the language of communications--e=amples
of language include bids! oers and acceptances. Institutional rules specify when
a communication is converted to a contract. &I dont think he is referring to the
amount of the bid itself which he categori/es as behavior.) Also included in his
category of institutions are the characteristics of the commodity! which he seems
to include implicitly &see below on H#* and HI*). $his seems a strange mi=ture--
are not institutions something that is a variable open to human choice while the
characteristics of a commodity are 0=ed by physics and biology@ He also includes
rules under which messages become contracts and thus allocations. If the legal
foundations of an economy were so simple we wouldnt have much to do. $he
order in which economic agents move sounds so innocent.
%ehavior is concerned with agent choices of messages or actions given the
agents characteristics &environment) and the practices &institutional rules)
relating such choices to allocations. He wants to test the assumptions of
ma=imi/ation of utility! risk aversion! and %ayesian learning &as opposed to
bounded rationality! gamblers! and selective perception in the face of cognitive
dissonance@).
mith categori/es behavior as the agentss choices of messages or action. $he
e=amples of utility ma=imi/ation and risk aversion make sense. %ut I do not
understand him when he illustrates behavior as including the transaction costs
of thinking! deciding! acting. 2akes sense if it refers to the acts of cognition.
$heories of behavior make predictions about messages &bids! oers)... 2aybe
he uses the term transaction costs "uite dierently than Billiamson or chmid.
He includes /ero transaction costs as part of behavior though this seems a part
of the environment-characteristics of the good rather than an attribute of people.
His classi0cation seems appropriate in the conte=t of observing that double
auctions come to e"uilibrium faster than ascending price auctions. He see that
bidders and sellers learn more about the others demand or supply schedules
faster with the double auction and in that sense transaction costs are less with
one institution rather than another. For mith! transaction cost and the institution
seem to be the same thing rather than one separable thing interacting with
another. Bhy is the conceptuali/ation of separability important@ If an institution
creates the cost! then change the institution and the cost is gone. %ut if the cost
is independent of the institution! then the institution may not abolish the cost!
but only change who bears it or who bears the conse"uences of the cost.
*onsider the cost of traders discovering the demand and supply schedules of the
other person. If these schedules were written on their foreheads the cost would
be cheap! but they are not. &It reminds me of the dierence between blood and
shirts--information on blood "uality is harder to determine than for shirts.) o the
information cost seems inherent in nature. Bhen this HI* situation is then
combined with dierent institutions such as ;utch or #nglish auctions we can
observe how "uickly both parties learn these schedules and reach a trading
agreement. mith observes that the type of auction makes a dierence.
![Page 3: Introduction to Institutional Economics](https://reader031.fdocuments.in/reader031/viewer/2022021323/577cc0751a28aba711902d37/html5/thumbnails/3.jpg)
ince time is money! a better institution is one that saves money by reducing a
cost. %oth parties may gain though one may gain more than another. A reduction
in transaction costs may be +areto-better! but one must be careful to assume
than all transaction cost is like friction and that all gain by its reduction.
He seems to assume here that all messages are bids &e=its) rather than voice.
Footnote < is worth studying carefully for how value is induced. $he subCect is
made to have a well ordered preference map &demand schedule)! whether that is
the way the person usually thinks or not. mith controls for commodity
characteristics by making the good featureless and abstract. miths induced
value approach means the game is for money only--there can be no attachment
to the commodity or any divergence between reservation and bid price.
#=perimental subCects are assigned to be buyers or sellers. #ach demander is
given a schedule indicating the redemption value of each unit ac"uired in a
market period. For e=ample! if the demander ac"uired one unit! the e=perimenter
would give the buyer .>(! .4( for the second unit! .6( for the third! etc. #ach
seller is charged for any units sold according to a schedule. e.g. the cost
schedule might be .,( for the 0rst unit! .6( for the second! and .>( for the third!
etc. o for instance! if at the end of the trading period! the buyer of one unit
could redeem it for .>( and be credited with the dierence between the
redemption value and what she paid! assume .64. $hus .>( - .64 D .14 net credit.
$he net credit possibility provides the incentive to trade advantageously. $his is
the way that characteristics of the commodity are controlled. For this to work of
course! it is implied via the payo schedules that this is not a H#* good--you
cant get a payo without trading. Eike all auctions! it is assumed the goods
already e=ist. $he problem is not one of investment and decisions involving
immobile assets.
2uch of the e=perimental literature is guided by nothing more sophisticated
than the static theory that markets will clear. &144) Bhat does this mean when
we observe that a lot of markets do not clear &labor markets being an obvious
case at the moment)@
mith says most people dont have to calculate to act in a way consistent with
calculation. 2arket competition means that either &1) those who randomly fall
into the right behavior survive and others do not. &,) a few who do calculate
force the others to appro=imate their behavior. How s"uare this with Frank who
observes that people who are non-opportunistic &non-calculation of advantage)
are sought by business partners insuring their survival. How relate to Heiner who
suggests because of the *-; gap! the 0rm with the ma=imi/ation calculation may
actually make more mistakes@ How relate to fact that the people making
mistakes are part of the environment of the smart calculating 0rm and cause the
calculation to go wrong@ mith attacks haneman and netsch and their
observations of people regarding market clearing behavior as unfair.
#ven if mith is right on the producing 0rm side! there is nothing e"uivalent on
the part of consumers. *onsumers who choose fair producers! who try to Custify
sunk costs! and regard opportunity cost as dierent from out of pocket costs do
![Page 4: Introduction to Institutional Economics](https://reader031.fdocuments.in/reader031/viewer/2022021323/577cc0751a28aba711902d37/html5/thumbnails/4.jpg)
not perishG they Cust dont consume as many goods &even if they might have
more utility and wind up less often in mental hospitals).
ernon miths :obel +ri/e acceptance speech is *onstructivist 8 #cological
Rationality in #conomics! AER! '<&<)56>4!4(? &,((<).