Institutions and Economic Theory: The Contribution of the New Institutional Economics (Economics, Cognition, and Society)

This second edition assesses some of the major refinements, extensions, and useful applications that have developed in neoinstitutionalist thought in recent years. More attention is given to the overlap between the New Institutional Economics and developments in economic history and political science. In addition to updated references, new material includes analysis of parallel developments in the field of economic sociology and its attacks on representatives of the NIE as well as an explanation of the institution-as-an-equilibrium-of-game approach. Already an international best seller, Institutions and Economic Theory is essential reading for economists and students attracted to the NIE approach. Scholars from such disciplines as political science, sociology, and law will find the work useful as the NIE continues to gain wide academic acceptance. A useful glossary for students is included. Eirik Furubotn is Honorary Professor of Economics, Co-Director of the Center for New Institutional Economics, University of Saarland, Germany and Research Fellow, Private Enterprise Research Center, Texas A&M University. Rudolph Richter is Professor Emeritus of Economics and Director of the Center for New Institutional Economics, University of Saarland, Germany. Front Cover......Page 1 Title Page ......Page 4 Copyright......Page 5 Contents......Page 6 Acknowledgments for the First Edition......Page 10 Acknowledgments for the Second Edition......Page 12 Preface to the First Edition......Page 14 Preface to the Second Edition......Page 18 1. Introductory Observations......Page 20 1.1. Some Basic Assumptions and Terms......Page 21 1.2. The Strange World of Costless Transactions......Page 31 1.3. The Ideal Type of the Classical Liberal State......Page 33 1.4. The Ideal Type of Market Socialism......Page 36 1.5. Constructed or Spontaneous Orders?......Page 38 1.6. The Work of the Invisible Hand Can Be Accelerated......Page 39 1.7. Rational lncompleteness......Page 40 1.8. Enforcement......Page 42 1.9. The Political Process......Page 44 1.10. Agency......Page 46 1.11. Institutional Stability......Page 47 1.12. Once More with Feeling......Page 49 1.13. The New Institutional Economics and Modern Institutionalism......Page 53 1.14. Some Notes on the History of the Old Institutional Economics......Page 59 1.15. Suggested Readings for Chapter 1......Page 63 2. Transaction Costs......Page 66 2.1. The Concept of Transaction......Page 68 2.2.1. Market Transaction Costs ......Page 70 2.2.2. Managerial Transaction Costs......Page 73 2.2.3. Political Transaction Costs......Page 74 2.3.1. Market Transaction Costs......Page 77 2.3.2. CostsManagerial Transaction Costs......Page 79 2.3.2. Political Transaction Costs......Page 82 2.4. Modeling Tr ansaction Costs: The Activity "Transaction"......Page 83 2.5. Some Notes on the Development of the Transaction-Cost Literature......Page 91 2.6. Suggested Readings for Chapter 2......Page 95 3. Absolute Property Rights: Ownership of Physical Objects......Page 98 3.1. The Property-Rights Approach: Some Basic Concepts......Page 100 3.2. Property Rights: Illustrations and Attempts at Definition......Page 105 3.2.1. Absolute Property Rights: Ownership and All That......Page 106 3.2.2. Relative Property Rights: Some Preliminary Remarks......Page 111 3.2.3. Other Rights and Conventions......Page 113 3.2.4. Property Rights in Social Capital......Page 114 3.3. Property in Physical Objects: The Private Property Issue......Page 115 3.3.1. Ownership and Control: Some Basic Observations......Page 116 3.3.2. Assigning Property Rights: The Internalization of External Effects......Page 120 3.3.3. The Concept of Efficiency in Property Rights Analysis......Page 127 3.4. Common Pool Resources......Page 129 3.4.1. The Tragedy of the Commons......Page 130 3.4.2. Institutional Solutions of the CPR Problem: Design Principles......Page 132 3.5. The Emergence of Property Rights......Page 135 3.5.1. The Invisible-Hand Theory of the Emergence of Property Rights......Page 137 3.5.2. The Optimistic Theory of the Emergence of Property Rights......Page 139 3.5.3. Contracting for Property Rights: The Role of Political Bargaining......Page 141 3.6. The Economic Analysis of Property Rights: Some Notes on the Literature......Page 146 3.7. Suggested Readings for Chapter 3......Page 151 4. Relative Property Rights: Contractual Obligations......Page 154 4.1 .1. Freedom of Contract......Page 156 4.1 .2. Liability from Contract......Page 158 4.2. Diverse Types of Contractual Obligations......Page 160 4.2.1. Sales Contract......Page 162 4.2.2. Lease Contract......Page 165 4.2.3. Employment Contract......Page 167 4.2.4. Loa n Contract......Page 169 4.3.1. The Ambiguity of the Te rm......Page 173 4.3.2. The Raison d'Etre of Economic Contract Theories......Page 179 4.4. Three Types of Contract Theory......Page 180 4.4.1. Ag ency Theory......Page 181 4.4.2. Self-Enfo rci ng Ag reements or Implicit Contract Theory......Page 189 4.4.3. Relational Contract Theory......Page 192 4.5. Resume......Page 207 4.6. The Economics of Contract Law and Contractual Behavior: Some Notes on the Literature......Page 209 4.6.1. Positive Ag ency Theory......Page 210 4.6.2. Self-Enfo rci ng Ag reements or Implicit Contract Theory......Page 211 4.6.3. Relational Contract Theory......Page 212 4.7. Suggested Readings for Chapter 4......Page 216 5. Contract Theory......Page 218 5.1. Overview of the Types of Contract Theory to Be Discussed......Page 220 5.2. Managerial Theory of the Firm: The Expense Preference Model......Page 222 5.3. The Principal-Agent Model: Moral Hazard......Page 225 5.3. 1. The Case of Certa in Results......Page 226 5.3.2. Uncertain Results......Page 231 5.3.3. Comments on the PA Approach of the Moral Hazard Type with Hidden Action......Page 239 5.4. The Principal-Agent Model: Adverse Selection......Page 241 5.4.1. The Case of Symmetric Information before and after Contract Conclusion......Page 242 5.4.2. Adverse Selection: Asymmetric Information until the Contract Is Concluded......Page 245 5.4.3. Adverse Selection: Two Generalizations......Page 250 5.4.4. Many Principals: Market Screening......Page 253 5.4.5. The Lemons Principle......Page 260 5.4.6. Some Comments on the Principal-Agent Approach with Adverse Selection......Page 264 5.5. Implicit Contracts......Page 265 5.6. The Incomplete Contract Model......Page 270 5.7. Self-Enforcing Agreements......Page 277 5.8. The Institution-as-an-Equilibrium-of-a-Game Approach: A Note......Page 284 5.9. Looking Back......Page 286 5.10.1. Managerial Theory of the Firm......Page 290 5.10.2. Principal-Agent Theory: Moral Hazard......Page 291 5.10.3. Principal-Agent Theory: Adverse Selection......Page 295 5.10.4. Implicit Contract Theory......Page 299 5.10.5. Incomplete Contract Theory......Page 300 5.10.6. Self-Enforcing Agreements......Page 304 5.10.7. The Institution-as-an-Equilibrium-of-a-Game Approach......Page 305 5.11. Suggested Readings for Chapter 5......Page 307 6. The New Institutional Economics Applied to Markets, Firms, and the State: General Remarks......Page 310 6.1. The Elementary Rules of a Private Ownership Economy......Page 311 6.2. General Remarks on Organizations: The Firm, the Market, and the State......Page 315 6.3.1. On the Elementary Order of a Private Ownership Economy......Page 324 6.3.2. On the Economics of Organizations......Page 326 6.3.3. On the Concept of Social Networks......Page 327 6.4 Suggested Readings for Chapter 6......Page 330 7. The New Institutional Economics of the Market......Page 332 7.1. The Market as Organization......Page 333 7.2. On Price Rigidity......Page 335 7.3. Market Organization as a Result of Market Cooperation......Page 338 7.4. Some Views of Neoinstitutionalists on Market Organization......Page 342 7.4.1. Precontractual Tra nsaction Activities: Search and Inspection......Page 344 7.4.2. Contract Formation......Page 353 7.4.3. Postcontractual Transaction Activities: Execution, Control, and Enforcement......Page 358 7.5. Markets: Conclusion and Outlook......Page 369 7.6. A Brief Guide to the Literature on Market Organization......Page 371 7.7. Suggested Readings for Chapter 7......Page 377 8.1. The Orthodox Neoclassical Firm......Page 380 8.2. The Incentive to Integrate......Page 389 8.3. The Limits of Integration......Page 399 8.4. Ownership and Control......Page 405 The General Part of This Chapter in Retrospect......Page 416 8.5. Institutional Models in the Tradition of the Neoclassical Theory of the Firm......Page 420 8.6. The Traditional Soviet Firm......Page 432 8.7. The Socialist Labor-Managed Firm......Page 440 8.8. Codetermination......Page 455 8.8.1. The Voluntary Codetermined Firm......Page 457 8.8.2. Mandatory and Voluntary Codetermination: A Comparison......Page 461 8.8.3. The Labor-Owned Firm......Page 465 8.9. A Comparison of Some Formal Models of the Firm......Page 470 8.10. The New Institutional Economics of the Firm: Forerunners and First Steps......Page 476 8.11. The New Institutional Economics of the Firm: Summary and Main Literature beyond Coase......Page 478 8.12. Suggested Readings for Chapter 8......Page 487 9. The New Institutional Economics of the State......Page 490 9.1. A Simple Neoclassical Theory of the State......Page 491 9.2. The Role of Political Institutions......Page 495 9.3. Political Markets......Page 501 9.4. International Relations......Page 504 9.4.1. Safeguarding International Agreements......Page 507 9.4.2. Enforcements of International Agreements......Page 508 9.5.1. The State......Page 512 9.5.2. International Relations......Page 516 9.6. Suggested Readings for Chapter 9......Page 517 10. Future Development of the New Institutional Economics......Page 520 10.1. Institutionalism as Extended Neoclassical Theory......Page 524 10.2. The Initial Approach Reconsidered......Page 526 10.2.1. Contradictory Assumptions......Page 527 10.2.2. Predictive Accuracy......Page 535 10.2.3. Optimization Costs......Page 538 10.2.4. Infinite Regress......Page 542 10.2.5. Economic Efficiency......Page 546 10.2.6. Coordination of Activity......Page 549 10.3. The Basis of a New Paradigm......Page 552 10.3.1. Diffusion of Information......Page 556 10.3.2. Shifting Preferences......Page 561 10.3.3. Efficiency Reconsidered......Page 565 10.4. Modern Institutionalism: The Opportunities for Progress......Page 567 Glossary......Page 574 References......Page 590 Author Index......Page 650 Subj ect Index......Page 662 A much-needed exploration of the New Institutional Economics, or NIE, including a critical assessment of its central theoretical contributions since the field's early beginnings in the 1960s, is this book's objective. It traces the development of major ideas about the genesis and significance of institutions as these ideas have been presented in the NIE. Given the fundamental understanding underlying work in this new area of research - that transactions involve the use of real resources and have costs - the book views the NIE as an amalgam of transaction-cost economics, property-rights analysis, and contract theory. Efforts are made to explain how the various theoretical strands discussed in the NIE literature fit into the general fabric of modern institutionalism, and how the new concepts put forward can be applied to institutional analysis. This book will be essential reading for economists attracted to the NIE approach. In addition, scholars from such disciplines as political science, sociology, and law will find the work useful as the NIE continues to gain wide academic acceptance. "This second edition assesses some of the major refinements, extensions, and useful applications that have developed in neoinstitutionalist thought in recent years. More attention is given to the overlap between the New Institutional Economics and developments in economic history and political science. In addition to updated references, new material includes analysis of parallel developments in the field of economic sociology and its attacks on representatives of the NIE as well as an explanation of the institution-as-an-equilibrium-of-game approach."--Jacket