New Institutional Economics: A Guidebook

Cover......Page 1
Half-title......Page 3
New Institutional Economics: A Guidebook......Page 5
Copyright......Page 6
Contents......Page 9
Tables......Page 12
Figures......Page 13
Contributors......Page 15
Acknowledgements......Page 23
Foreword......Page 25
Conclusion......Page 39
A Road Map for the Guidebook......Page 41
Part I: Foundations......Page 43
Part II: Methodology......Page 47
Part III: Strategy and Management......Page 49
Part IV: Industrial Organization......Page 51
Part V: Institutional Design......Page 53
Part VI: Challenges to Institutional Analysis......Page 56
Introduction......Page 61
What is new institutional economics?......Page 64
A framework for new institutional economics......Page 67
Substantial progress has been made......Page 71
Vertical integration and the comparative governance paradigm......Page 72
Conclusions......Page 77
Part I - Foundations......Page 81
1.1 Introduction......Page 83
1.2 The nature of the firm: seventy years after......Page 84
1.2.3 Institutional environment......Page 85
1.2.4 An "incomplete" theory of the firm based on the comparison between markets' and firms" characteristics......Page 86
1.3.1 Assumptions and sketch of the argument......Page 87
1.3.2 Departures from Coase's theory and definition of a firm......Page 88
1.4.1 Assumptions and sketch of the argument......Page 89
1.4.2 Departures from Coase's theory and definition of the firm......Page 91
1.5.1 Assumptions and sketch of the argument......Page 92
1.5.2 Departures from Coase's theory and definition of the firm......Page 93
1.6.1 Assumptions and sketch of the argument......Page 94
1.6.2 Departures from Coase's theory and definition of the firm......Page 95
1.7 Conclusion......Page 96
2.1.1 Contracts as analytical tools, contracts as objects of analysis......Page 97
2.1.3 From contracts to their institutional framing......Page 98
2.2 From incentives to governance......Page 100
2.2.1.1 Complete incentive contracts......Page 101
2.2.1.2 Are incomplete contracts consistent in a world of perfectly rational agents?......Page 102
2.2.1.3 The consequences of contractual incompleteness......Page 103
2.2.1.4 Three "incomplete contract" theories......Page 104
2.2.1.5 Incomplete contract theory and transaction cost reasoning......Page 105
2.2.2 The governance approach to contracts......Page 106
2.3.1.1 Law as complementary to contracts......Page 108
2.3.1.2 Complementarity depends on bilateral context and on the design of institutions......Page 109
2.3.2 Enforcement......Page 111
2.4.1 Breach remedy and interpretation rules......Page 112
2.4.1.1 Optimal damages......Page 113
2.4.1.2 Interpretation rules......Page 115
2.4.2 Contracts and incentives to cooperate......Page 117
2.5.1 Specialization and organization of the judiciary......Page 119
2.5.1.1 Specialization of rules and specialization of enforcement mechanisms: costs and benefits......Page 120
2.5.1.2 Designing more efficient institutions......Page 121
2.5.2 Public versus private or self-enforcement......Page 122
2.6 A research agenda......Page 124
3.1 Introduction......Page 127
3.2 The revival of institutional economics......Page 128
3.3 The role of government in new institutional economics......Page 130
3.4 The dynamics of institutions......Page 132
3.5 The complexity of institutions......Page 134
3.6 Implementing institutional reform......Page 135
3.7 Further work in new institutional economics......Page 137
3.8 Conclusion......Page 139
4.1 Introduction......Page 141
4.2.1 Human beings are specialists in the cognitive niche......Page 142
4.2.3 Success - and maladaptation......Page 143
4.3 Rationality......Page 144
4.3.1 Instinctive rationality......Page 145
4.3.2 Ecological rationality: the maladaptation of our instincts......Page 146
4.3.4 Weakness of will......Page 147
4.4 Cooperation......Page 148
4.4.1.1 Genetic relatedness......Page 149
4.4.1.2 Emotional commitment......Page 150
4.4.1.4 Cheating detectors......Page 151
4.4.1.5 Strong reciprocity......Page 152
4.4.2.1 The limits of instinctive cooperation......Page 153
4.4.2.2 The unnaturalness of market exchange......Page 154
4.5.1 Instincts as building blocks of institutions......Page 155
4.5.3 Institutions as enforcement......Page 156
4.6 Where are we humans heading?......Page 157
Acknowledgements......Page 158
Part II - Methodology......Page 161
5.1 Introduction......Page 163
5.2 Titles, conflict, and land use in the Brazilian Amazon......Page 165
5.3 The erosion of checks and balances in Argentina, and the rise of populism......Page 172
5.4 Southern paternalism and the American welfare state: the dynamics of institutions......Page 175
5.5 The lessons from case studies......Page 179
6.1 Introduction......Page 182
6.2.1 To be or not to be, the simple question......Page 183
6.2.2 One form, two forms, three forms, more?......Page 186
6.2.3 Counting questions: how many to be?......Page 188
6.2.4 Constrained to be......Page 189
6.3 Econometric challenges and data pitfalls......Page 190
6.3.1 The fallacy of dichotomous choice......Page 191
6.3.2 Endogenous decision making and self-selection......Page 192
6.3.3 Constraints of the equilibrium approach......Page 193
6.3.4 Data limitations on statistical techniques......Page 195
6.4.1 Vertical integration......Page 196
6.4.2 Asset specificity......Page 198
6.4.3 An economic system perspective......Page 199
6.5 Conclusion......Page 200
7.2 Principles of experimental economics......Page 202
7.3 Behaviour in the laboratory: bounded rationality and social preferences......Page 205
7.3.1 Clarifying the concept of bounded rationality: “ learning experiments”......Page 206
7.3.2 Opportunism and social preferences in the laboratory......Page 209
7.4 "Institutions matter": playing with the rules......Page 211
7.5 Conclusion......Page 216
8.1 Introduction......Page 218
8.2.1 Coordination games......Page 219
8.2.2 The commitment problem......Page 221
8.2.3 Institutions as commitment devices......Page 224
8.3.1 A principal-agent game under asymmetric information......Page 226
8.3.2 Institutions as information-enhancing devices......Page 228
8.4 Repeated cooperation and institutions......Page 229
8.4.1 Prisoners' dilemma and repeated games......Page 230
8.4.2 Institutions as cooperation-enhancing institutions......Page 232
8.5.1 Merchant guilds as a contract-enforcing device in medieval trade......Page 235
8.5.2 eBay as a reputation-building device for online traders......Page 237
8.6 Conclusion......Page 239
Part III - Strategy and Management......Page 241
9.1 Introduction......Page 243
9.2 Exchange attributes, organizational choice, and performance......Page 246
9.2.1 Organizational choice and transaction performance......Page 247
9.2.2 Shift parameters, organizational choice, and transaction performance......Page 249
9.2.3 TCE and strategic positioning: organizational choice and firm performance......Page 252
9.3.1 M-Form versus U-form......Page 254
9.3.2 Corporate governance......Page 256
9.4 Organizational change and performance......Page 257
9.4.1 Evaluating Williamson's weak-form selection hypothesis......Page 258
9.4.2 Organizational inertia and its effects on rates of change, profitability, and firm survival......Page 260
9.4.3 Organizational vacillation......Page 262
9.5 The problem-solving perspective......Page 263
9.6 Conclusion......Page 266
10.1 Introduction......Page 269
10.2.1 Alliance motives......Page 270
10.2.2 Alliance forms......Page 272
10.2.3 Collaboration and competition......Page 273
10.3 The transaction cost theory of alliances......Page 275
10.3.1 Why ally? Alliances within the market-hierarchy continuum......Page 277
10.3.2 With whom to ally? Complementary resources and technological overlap......Page 279
10.3.3 How to design alliance structures: the continuum of market and hierarchy features within alliances......Page 280
10.3.4 Alliance context and alliance design choices......Page 283
10.4 Current issues: how can the new industrial economics approach make further progress on the seven questions of alliances?......Page 284
10.4.1.1 Survey- and case-based studies......Page 285
10.4.1.2 Event studies......Page 286
10.4.1.3 Patents, knowledge flows, and alliance outcomes......Page 287
10.4.1.4 Alliance decisions, alliance outcomes, and endogeneity......Page 288
10.4.2 How to manage the alliance: beyond discrete structural alternatives to contractual terms......Page 289
10.4.3 Managing networks of alliances......Page 291
10.4.3.1 The social network as a relevant context for alliances......Page 292
10.5 Conclusion......Page 293
11.1 Introduction......Page 295
11.2 Legal definition of franchising and main provisions......Page 296
11.3.1.1 Franchising as a way to speed up chain expansion......Page 297
11.3.1.2 Make-or-buy as a way of mitigating contractual hazards......Page 298
11.3.2.2 Dual distribution as a tough organization......Page 300
11.4.1 Franchising as an incentive contract: monetary provisions......Page 303
11.4.2 Self-enforcement in contracting......Page 304
11.4.3 More on non-monetary contractual provisions......Page 305
11.5.1 Unfairness versus efficiency in contracting......Page 307
11.5.2 Monopolization versus efficiency in contracts: consequences for antitrust......Page 309
11.6 Conclusion......Page 310
Part IV - Industrial Organization......Page 313
12.1 The problem: make versus buy......Page 315
12.2 Theoretical background......Page 316
12.2.1.2 Uncertainty and complexity......Page 317
12.2.1.4 Measurement or search cost......Page 318
12.2.2 Mechanisms of governance......Page 319
12.2.2.1 Relative performance of governance mechanisms......Page 320
12.2.2.3 Uncertainty......Page 321
12.2.2.4 Frequency......Page 322
12.2.2.5 Measurement costs......Page 323
12.2.2.6 Connectedness......Page 324
12.2.3.2 Exploiting scale and learning economies......Page 325
12.2.3.4 Leakage of capabilities and private information......Page 326
12.2.4.1 Changes in the institutional environment......Page 327
12.2.4.2 Changes in the technological environment......Page 328
12.3 Limitations and future of empirical research......Page 330
13.1 Introduction......Page 332
13.2 Political or bureaucratic versus market allocation of water......Page 333
13.3 The mis-allocation of water in the American West......Page 335
13.4.1 Non-vested usufruct rights......Page 338
13.4.2 Appropriative water rights subject to state regulation......Page 340
13.4.3.2 Irrigation districts and other water supply organi.zations......Page 342
13.4.3.3 The Federal Bureau of Reclamation......Page 343
13.5.1 The high costs of bounding......Page 344
13.5.2 The high costs of measurement......Page 345
13.5.3 The interconnected private and public goods characteristics of water......Page 346
13.6 Policy responses......Page 348
13.7 Concluding remarks......Page 350
14.1 Introduction......Page 352
14.2 Research on the economic organization of food: a brief history......Page 353
14.3 Contracts and vertical integration......Page 356
14.3.1 Why contract?......Page 357
14.3.2 Small-numbers bargaining......Page 359
14.4 Network organizations......Page 360
14.5 Conclusion......Page 364
Part V - Institutional Design......Page 365
15.1 Introduction......Page 367
15.2 Buy, lobby, or sue......Page 368
15.2.2.1 Buying direct influence......Page 369
15.2.2.2 Buying indirect influence......Page 370
15.2.3 Lobbying......Page 371
15.2.3.2 Lobbying for indirect influence......Page 372
15.2.4 Suing......Page 374
15.3 Strategic choice of instruments......Page 375
15.3.1 A model and empirical implications......Page 376
15.3.1.1 The model......Page 377
15.3.1.2 The Symmetric information benchmark......Page 378
15.3.1.3 Informative indirect lobbying......Page 380
15.3.1.4 Empirical implications......Page 382
15.4 Interest group participation in party-centered systems......Page 383
15.5 Conclusion......Page 386
16.1 Introduction......Page 388
16.2.1 The theoretical path of rational price setting......Page 390
16.2.2 The theoretical path of the adapted institutional framework......Page 391
16.3 Bases for institutional analysis of deregulation policy......Page 394
16.3.1 Freeing the sources of monopolistic rents: the issue of the attractiveness of the reforms......Page 395
16.3.2 Revising industry structures: the feasibility of industrial surgery......Page 396
16.3.3 Recasting industries that are constrained by the initial configuration of their rights......Page 398
16.3.4 Adapting governance structures to the nature of the transactions......Page 400
16.4 Why building an appropriate governance structure is still problematic?......Page 405
16.4.1 Competition where possible: the unbundling and its boundaries......Page 407
16.4.2 Boundaries are set by "modularity" decisions......Page 408
16.4.3 Sequencing matters......Page 412
16.5 Is "institution-building" a remedy to governance failure?......Page 413
16.5.1 Is perfect governance possible?......Page 414
16.5.2 The operationalization of North's analysis......Page 415
16.5.3 Accounting for the issue of adapting the reforms......Page 416
16.6.1 The example of the English and German electricity reforms......Page 419
16.6.2 The issue of convergence......Page 420
16.7 Conclusion......Page 421
17.1 Introduction......Page 423
17.2.1 The research program of constitutional political economy......Page 424
17.2.2.2 The constitution as incomplete contract......Page 427
17.2.2.4 The constitutional contract as pre-commitment device......Page 428
17.2.3.1 Econometric tests......Page 429
17.2.4 Constitutional political economy as part of new institutional economics......Page 430
17.3.1 Introductory remarks......Page 431
17.3.2 Electoral rules......Page 432
17.3.3.2 Horizontal separation in general......Page 435
17.3.3.3 Forms of government: presidential versus parliamentary regimens......Page 436
17.3.3.4 A forgotten branch: the judiciary......Page 438
17.3.4 Vertical separation of powers: federalism......Page 441
17.3.5 Representative versus direct democracy......Page 445
17.3.6 Summary......Page 446
17.4 Possibilities and desiderata for future development......Page 447
18.1 Introduction......Page 449
18.2 Privatization and organizational hybrids: in search of the "right" property rights......Page 452
18.3 Contracts......Page 455
18.4 Managing institutional change......Page 460
18.5 Conclusion......Page 463
Part VI - Challenges to Institutional Analysis......Page 467
19.1 The case for law and economics: beyond disciplinary nirvanas?......Page 469
19.2.1 The first wave in Chicago......Page 472
19.2.2 Chicago and New Haven......Page 473
19.2.3 The second wave in Chicago......Page 474
19.3 Does new institutional economics meet law and economics?......Page 475
19.4 Meaning of transaction costs: new versus old institutional economics......Page 477
19.4.1 Defining complex transactions: the old institutional economics approach......Page 478
19.4.1.1 Authorized transaction......Page 480
19.5 Setting the research agenda: complex transactions and institutional complementarities......Page 481
20.1 Introduction......Page 485
20.2.1 Coase and later work on the theory of the firm......Page 486
20.2.2 A simple representation......Page 487
20.2.3 Basic characteristics of the modern theory of the firm......Page 488
20.2.4 What are the critics criticizing?......Page 489
20.3.1 Bounded rationality......Page 490
20.3.2 Motivation......Page 492
20.3.3 Challenges to the theory of the firm?......Page 493
20.4.1 The knowledge-based view......Page 494
20.4.2 The knowledge-based view as a theory of economic organization......Page 495
20.4.3 Challenges to the theory of the firm?......Page 496
20.5.1 Concepts of entrepreneurship......Page 497
20.5.3 Challenges to the theory of the firm?......Page 498
20.6.1 Path dependence......Page 499
20.6.2 Selection and survival: are all organizations "efficient"?......Page 500
Acknowledgements......Page 502
21.2 The transaction-cost approach......Page 503
21.3 The principal-agent approach......Page 510
21.4 The equilibrium-of-the-game approach......Page 513
21.5 The evolutionary approach......Page 517
21.6 Conclusion......Page 521
Notes......Page 523
References......Page 549
Index......Page 603