NIE lecture1

8/8/2019 NIE lecture1

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The NIE is ´NewµThe NIE is ´Newµ

To distinguish it from the ¶oldµ institutionalTo distinguish it from the ¶oldµ institutionaleconomists such as Thorsten Veblen, John R.economists such as Thorsten Veblen, John R.Commons, Wesley Mitchell and ClarenceCommons, Wesley Mitchell and Clarence

AyresAyres

The old institutional economics wasThe old institutional economics waseconomics with institutions but withouteconomics with institutions but without

theory; standard neoclassical economics; andtheory; standard neoclassical economics; andthe NIE is attempting to provide economicsthe NIE is attempting to provide economicswith both theory and institutionswith both theory and institutions



NIENIE

The new institutional economics, or NIE, is aThe new institutional economics, or NIE, is abranch of economics that especiallybranch of economics that especiallyincorporates various institutional constraintsincorporates various institutional constraints

into formal economic analysis in order tointo formal economic analysis in order toexplain, on the basis of rational choice,explain, on the basis of rational choice,observable realobservable real--world phenomena thatworld phenomena thatstandard neoclassical economics (absentstandard neoclassical economics (absent

institutional constraints) is unable to explain,institutional constraints) is unable to explain,except by assuming irrational behavior on theexcept by assuming irrational behavior on thepart of individual economic agentspart of individual economic agents



The Neoclassical BehaviorThe Neoclassical Behavior

AssumptionsAssumptions

The economics world is view in equilibriumThe economics world is view in equilibrium

Economic actors face same choice situationEconomic actors face same choice situation

The actor have stable preferences andThe actor have stable preferences andcriteriacriteria

Opportunity for improving outcomesOpportunity for improving outcomes

Fail to maximized the preferencesFail to maximized the preferences Perfect informationPerfect information

Zero transaction costZero transaction cost



InstitutionsInstitutions

Laws and regulationsLaws and regulations

ContractsContracts

Constitutional lawsConstitutional laws

Informal:Informal:

TrustTrust

Ethics or valuesEthics or values

Political normsPolitical norms

Formal:Formal:



OrganizationOrganization

Organizations are sets of actors whoOrganizations are sets of actors whocollectively pursue common objectivescollectively pursue common objectives

Political organizationPolitical organization

Economic organizationEconomic organization

Social organizationSocial organization

Educational organizationEducational organization



Institutions are the rules that shape theInstitutions are the rules that shape thebehavior of organizations and individuals in abehavior of organizations and individuals in asocietysociety

Reforming institutions are rules thatReforming institutions are rules thatdetermine the non pricedetermine the non price ininccenenttivesives for thefor thebehavior of individual and organizationsbehavior of individual and organizations

Rules may solve information and enforcementRules may solve information and enforcementproblemsproblems

InstitutionsInstitutions ChangeChange



InstitutionalInstitutional ChangeChange (North)(North)1.1. Scarcity and competitionScarcity and competition

2.2. Competition drives skill andCompetition drives skill andknowledgeknowledge

3.3. Institutional framework dictatesInstitutional framework dictatesskill and knowledgeskill and knowledge

4.4. PerceptionsPerceptions5.5. Economic scopes and pathEconomic scopes and path

dependentdependent



Embedded ness:

informal institutions, customs,Tradition, norms religion

Institutional environment:Formal rules of the game-esp. property

(polity, judiciary, bureaucracy)

Governance:Play of the game-esp.

contract (aligning governanceStructures with transactions)

Resource allocation and employment(prices and quantities; incentive alignment)

Social theory (L1)

Economics of

Property rights/

Positive political

Theory (L2)

Transaction cost

Economics (L3)

Neoclassical

Economics/

Agency theory (L4)

LEVEL



Level 1Level 1 is undertaken by some economic historian andis undertaken by some economic historian and

other social scientistsother social scientists

Level 2Level 2 is referred to institutional environment (formalis referred to institutional environment (formal

rules): property rightrules): property right

Level 3Level 3 the governance of contractual relationthe governance of contractual relation

(transaction cost)(transaction cost) Level 4Level 4

neoclassical economics (agency theory)neoclassical economics (agency theory)



The Concept of Property RightThe Concept of Property Right

There are the rights to use an assetThere are the rights to use an asset

The right to earn income from an assetThe right to earn income from an assetand contractand contract

The right to transfer permanently toThe right to transfer permanently to

another party ownership right over ananother party ownership right over anasset (sell an asset)asset (sell an asset)



The Concept of Transaction CostThe Concept of Transaction Cost

Consist of the cost of measuring theConsist of the cost of measuring theattribute of what is being exchange andattribute of what is being exchange andthe cost of protecting right, policingthe cost of protecting right, policingand enforcing agreementand enforcing agreement

Depend on human behavior assumptionsDepend on human behavior assumptions

i.e.i.e. bounded rationality bounded rationality andandopportunismopportunism



The Concept of ContractThe Concept of Contract

Manifestations of intention to act orManifestations of intention to act or

refrain from acting in a specified wayrefrain from acting in a specified way The choice of contracts is determine byThe choice of contracts is determine by

transaction cost, economic risk andtransaction cost, economic risk andlegal arrangementlegal arrangement



The Concept of Agency theoryThe Concept of Agency theory

The relationship between two parties, aThe relationship between two parties, aprincipal and an agent who makesprincipal and an agent who makesdecisions on the behalf of the principaldecisions on the behalf of the principal(market and hierarchies)(market and hierarchies)

Information and enforcement problemsInformation and enforcement problemstrigger adverse selection and moraltrigger adverse selection and moral

hazardhazard

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NIE lecture1