CHAPTER 1: INTRODUCTION TO INSTITUTIONAL ECONOMICS 1. General concepts * Institutions are the rules of the game in a society or constraints that shape human interaction. (quy định của các trò chơi trong xã hội, định hình phản ứng của con người) * The role of institutions: - Reducing uncertaintly by providing a structure to everyday life - Shaping human interaction, so that when we wish to meet friends on the street, drive an automobile, buy oranges, borrow money, form a business … we know how to perform these tasks - Structuring incentives in human exchange, whether political, social, or economic * Chacracteristics of Insitutions • Institutions are both formal and informal - Formal constraints: rules that human beings devise (luật lệ mà con người nghĩ ra) - Informal constraints: conventions and codes of behaviour (quy ước và quy tắc ứng xử) • Institutions maybe created, or they may simply evolve over time • Institutional constraints include: - What individuals are prohibited from doing and, - Under what conditions some individuals are permitted to undertake certains activities. - Punishment is enacted when the rules and informal codes are violated. • Institutional change shapes the way societies evolve through time and hence is the key to understand historical change. Institutional economics (IE) = Institutions + Economics
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CHAPTER 1: INTRODUCTION TO INSTITUTIONAL ECONOMICS 1 General concepts
* Institutions are the rules of the game in a society or constraints that shape human
interaction (quy định của các trò chơi trong xã hội, định hình phản ứng của con
* The role of institutions:
- Reducing uncertaintly by providing a structure to everyday life
- Shaping human interaction, so that when we wish to meet friends on the street, drive an automobile, buy oranges, borrow money, form a business … we know how to perform these tasks
- Structuring incentives in human exchange, whether political, social, or economic
* Chacracteristics of Insitutions
Institutions are both formal and informal
- Formal constraints: rules that human beings devise (luật lệ mà con người
nghĩ ra)
- Informal constraints: conventions and codes of behaviour (quy ước và quy
tắc ứng xử)
Institutions maybe created, or they may simply evolve over time Institutional constraints include:
- What individuals are prohibited from doing and,
- Under what conditions some individuals are permitted to undertake certains
- Punishment is enacted when the rules and informal codes are violated.
Institutional change shapes the way societies evolve through time and hence is the key to understand historical change.
Institutional economics (IE) = Institutions + Economics
D1: a school of economics that emphasizes the importance of social institutions in
influencing economic behaviour
D2: Institutions economics views markets as a result of the complex interaction of
various institutions (e.g individuals, firms, states, social norms)
D3: “Institutional economics denotes a variety of traditions in economics that are
concerned with the social institutions linked to the production, distribution and consumption of goods.
2 Institutions economics as a field of study
This part concentrates on the two major traditions of institutionalist thought in
The first (a.k.a “old” institutional economics) is the American institutionalist
tradition that began at the turn of the century and has continued uninterrupted to this day.
Trang 2 The second (a.k.a “new” institutional economics) is a more recent development,
but can be seen as a revival and considerable expansion of the institutionalist elements to be found in classical, neoclassical, and Austrian economics.
Criticisms of the Old institutional economics (OIE)
- The OIE does not represent a single well-defined or unified body of thought,
methodology, or program of research (không định nghĩa hoặc hệ thống học thuật thể chế)
- The OIE does not appreciate the importance of unintended and evolutionary
processes in institutional development (không coi trọng sự phát triển không ngừng)
- The OIE are more interventionist, favouring greater government involvement to
correct institutional failures (theo trường phái can thiệp, coi trọng sự can thiệp của nhà nước)
About the New Institutional Economics (NIE)
The body of thought of the NIE began simply as an attempt to extend the range ofneoclassical theory
What was desired primarily was change in certain (microeconomic) key assumptions.
The NIE is still an evolving field of study
The importance of viewing insitutions as endogenuos “variables” that have to be explained within the framework of the economic model
It no longer seems possible to justify the use of “frictionless” economic models that are based on assumptions of costless transactions (as in the Neoclassical model)
- Transaction costs (TC) is an obvious phenomenon
Decision makers cannot be assumed to be “completely” informed
- R.Coase did receive the Nobel Prize in Economics (1991) for his pioneering
contributions related to TC The analytical methods of the NIE
- Transaction – cost economics- Property-rights analysis
- Economic analysis of contracts
Transaction-cost economics
- Transaction costs arise in connection with the exchange process
- Example: search and information costs, bargaining and decision costs, and
policing and enforcement costs … Property-right analysis
- The system of property rights in an economic system defines the positions of individuals with respect to the use of scarce resources.
- Allocation of property right influences incentives and human behaviour Economic analysis of contract (or Contract theory)
- Contract theory deals with incentives and asymetric information problems
Trang 3 Contract theory is considered as a “relative” of both transaction-cost economics and property-right analysis.
3 Methodology in the NIE
The “methodological” problem of the NIE
- The NIE deals with complex issues owing to the complexity of social systems.
→ It calls for analytical innovations to better understand the specificities of dynamic
social interactions, the games played by agents around rules they might decide to comply with or not…
- The need to combine several methodologies.
- Of course, mathematical modeling is a key tool However, in its current state of development, the NIE still to identify the causal relationship to be examined to check whether the theories fit the facts.
3.1 Case study
- To identify the most relevant regularities to be explained – the “stylized facts” and to carry out a first test of the complex interrelation of causal relationships.
- This calls for the collection of wide sets of qualitative data.
3.2 Game theory
When stylized facts are identified, economic modeling, especially that carried out by game theory, is a good way of exploring their rationalization.
This type of analysis fits well with the analysis of institutional systems because we are dealing with interacting agents playing rules, and the problem of credibility when dealing with institutions.
3.3 New institutional econometrics
To control various alternative explanations and for the impact of multiple factors that interrelate.
There are the specificities of the constrains of econometrics with regards institutions.
Since the issues raised by institutional scholars are relatively new, most statistical systems are not capable of providing scholars with relevant data.
Efforts are therefore oriented not only towards processing existing data but also towards the development of new data sources.
3.4 Experimental methodology
Since we are dealing with human behaviour, the complexity of which is still poorly taken into account in economic theories → experimental economics, via laboratories, is one way of improving our knowledge
- Laboratories allow the actual decision made by agents, and sometimes their motivations, to be observed.
- It reveals how “agents” behave, with the possibility to control the parameters
- It provides data for econometric models QUIZ:
1 The greatest concern of institutional economics is the constitution F (chưa đủ)2 Institutions can be formal or informal.T
Trang 43 Institutions help reduce the risks of uncertainty in our lives T 4 Institutions regulate how we meet friends on the street T
5 The change of social forms is closely linked with institutional changes T 6 Compared with the old institutional economics, the new institutional economics has a less stable theoretical framework F oie mới là ko có well defined…
7 The main analytical tools of institutional economics are opportunity cost analysis, transaction cost analysis and human rights analysis F thiếu
8 Contracts are always expressed in terms of binding clause in written documents F
9 Methodologies for studying institutional economics are diverse T
10 Phân bổ quyền sử hữu có ảnh hưởng đến hành vi và động lực của con người:Đ
Trang 5CHAPTER 2.1: TRANSACTION COST 1 Introduction to Transaction-cost analysis
Because of restricted knowledge, and the tendency to make errors (imperfect human)
- Human must incur what we call “transaction cost”, that can be understood in general as the costs of running an economy
- Real-world decision makers is always different form the hypothetical decision makers of neoclassical theory (zero transaction cost)
Nonzero transaction costs will be incurred no matter what sector of an economy.
Not only do positive transaction costs exist, but they are, in fact, quantitatively substantial.
- According to some estimates, Tc in modern market economies comprise as much as 50 to 60 percent of net national product.
Transaction costs have to be added to production and transport costs-the costs
normally recognized in the theory of the firm.
- In practice, transaction costs are not easily distingguished from production or transport costs or, indeed, any other type of cost.
2 The concept of transaction
“A transaction occurs when a good or service is transferred across a technologicallyseparable interface One stage of activity terminates and another begins”
The term is restricted to situations in which resources are actually transferred in the physical sense of “delivery”.
- It can be seen as resulting largely from the division of labor Such delivery may occur within firms or across markets
- Thus, it is possible to speak of internal and external transactions (or of intrafirm and market transactions)
“Transactions are the alienation and acquisition between individuals of the right offuture ownership of physical things”
Again, the definition deals with the transfer of resources but now in the legal sense: the transfer of property rights.
Contract rights should be added to this concept.
In addition to economic transactions, other “social actions” (social transaction) are
also the objects of concern in the economic analysis of institutions
Actions/Transactions are necessary to establish, maintain, or change social relationships.
→ Economic transactions are a special kind of social transaction.
- Social actions are necessary for the formation and maintenance of the institutional framework in which economic activity occurs.
3 Three types of transaction cost
In this section, we focus on 3 types of transaction costs:
- The costs of using the market (market transaction costs),
Trang 6- The costs of exercising the right to give orders within a firm (managerial transaction costs),
- The costs associated with the running and adjusting of the institutional framework of a polity (political transaction costs)
3.1 Market transaction costs
Transaction cost associates to “resource losses incurred due to imperfectinformation”
- Remind: The complete absense of transaction costs (as in neoclassical models) is connected with the assumption of complete information
- In reality, information is, of course, substantially incomplete There exists market uncertainty
- No decision maker know immediately and automatically who will buy or sell each product or under what conditions
Market transaction costs consist fundametally of information and barganing costs
- Information costs are clearly important, but the magnitude of bargaining costs should not be underestimated.
may be classified in more detail as follows:
1 the costs of preparing contracts (search and information costs)
2 the costs of concluding contracts (costs of bargaining and decision making) 3 the costs of monitoring and enforcing the contractual obligations
4 the costs of establishing and tending social relations Examples:
C1: Potential traders must search each other out
C2: Once such interested parties have made contact, they must try to determine who the other party is and whether he is willing and able to live up to any agreement
C3: Negotiations are needed to establish the detailed conditions of the exchange
C4: Since errors may occur, the fulfilment of the contract must be supervised There may be a need to provide legal safeguards.
C5: It is valuable for traders to know each other The social structure of the market matters.
3.2 Managerial transaction costs
What is of concern here is the cost of impleymenting the labor contracts that existbetween and its employees.
- For convenience, assume that employment contracts have already been concluded
Managerial transaction costs reduce to the following:
The costs of setting up, maintaining, or changing an organizational design:
costs of personnel management, investments in information technology, public relations, and lobbying,…
The cost of running an organization.
a, Information costs – the costs of controlling the managers of a firm by the
firm’s owners, the costs of managerial decision making, of negotiating, setting
Trang 7or changing prices, of monitoring the execution of orders, and measuring the performance of workers, agency costs, costs of information management.
b, The costs associated with the physical transfer of goods and servicesacross a separable interface The costs of idle time in the handling of
semifinished products, the costs of intrafirm transport.
3.3 Political Transaction Costs
Market and managerial transaction costs are assumed to take place against a welldefined political background → this involves costs.
They are, in a general sense, the costs of supplying public goods by collectiveaction, and they can be understood as analogous to managerial transaction costs.
The costs of setting up, maintaining and changing a system’s formal and
informal political organization: the costs associated with the establishment of the
legal framework, the administrative structure, the military, the educational system, the judiciary, the costs associated with political parties and pressure groups…
The costs of running a polity: These are current expenditures for those things, the
costs of decision making, the costs of giving (officical) orders, and the costs of monitoring and enforcing the instructions, …To a certain extent, both managerial and
political tracsaction costs can be interpreted as agency costs, or the costs that arise in aprincipal – agent relationship
- An agency relationship between two parties in which one party (the agent) acts for/on behalf of a second party (the principal)
- Given the opportunism, the agent will not always act fully in the interest of the
The principal can control the situation by establishing appropriate incentives for the agent
- For examples, he can incur monitoring costs designed to reduce the aberrant activities of the agent or share the benefits that are created by the activity
Nevertheless, there will always remain some divergence between the agent’s
decisions (a.k.a reality) and those that would maximize the welfare of the principal (a.k.a expectations)
- The dollar equivalent of this difference has been termed the “residual loss” Some important notes:
- The level of tracsaction costs depend on the behavior of individuals
Examples: Monitoring and enforcement costs will tend to be low if mutual trust
predominates in the society.
- The expenses of public education, and of motivating people, have to be
viewed, in part, as contributions that bring about lesser “frictions” (transaction costs) in society and enhance economic productivity.
Chia thành 2 chi phí: set up và running
Trang 84 Estimate the size of transaction costs: some examples
The objective of this section is to provide (at least) some basic ideas about the magnitude of transaction cost
Example 1:
The price of a given type of camera can show variations of +/- 10% around the average price
Even though consumers know that price differences are significant for certain products, many individual avoid expending the time and effort necessary to find the lowest cost supplier.
→ The price differences relative to an average price can be interpreted as measures of
the consumer’s search costs.
Example 2:
For the purchase of expensive objects like houses, consumers tend to hire adviser such
as realtors, lawyers, and financial consultants, who supply “transaction services”
The fees paid by consumers to these individuals or firms can relate to the magnitudes of such transaction expenditures
Example 3:
From the suppliers’ side of the market, transaction costs or selling costs (Scherer 1987) consist of the outlays made in marketing a particular commodity.
The costs of marketing are measured by the difference between production costs andthe price paid for the commodity by the final consumer.
- Data from West Germany in 1959 reveal that, for 116 non-food commodity groups, the average marketing cost was 49 percent of the final consumer price.
Example 4:
So-called menu costs (the costs of changing price labels) play an important role in justifying the phenomenon of “price rigidity”
Changing prices is a complex process, requiring a nontrivial amount of resources - The menu costs average $105,887 per year, comprising 0.70 percent of
revenues, 35.2 percent of net margins → The menu costs may quite certainly form a barrier to price changes
Excessive transaction costs can impede economic activity So institutions emerged to minimize these transaction costs
- For example: bank, market, firm (các cái này gọi là thể chế) Minimizing transaction cost is not an economically reasonable aim
- The growth of transaction costs is a necessary part of realizing gains from increase in division of labor and specialization
→ Rather, what matters for the judgment of the economic quality (“efficiency”) of an
economic entity are its total economic results not its level of transaction costs
The question of whether such costs are economically justified takes on great significance
tồn tại luôn luôn trong xh
- nếu chi phí gd quá lớn thì sẽ ngăn cản các hđ kinh tế -> các thể chế xuất hiện để tối thiểu hóa các chi phí gd
- VD: bank, market, firm,… -> gọi chung là thể chế
Trang 95 Expansion of transaction cost analysis
The institution of money has emerged in order to overcome the friction of a barter
- A barter economy is a cashless economic system in which services and goods are traded at negotiated rates.
Money was compared with a lubricant that would reduce friction
- In a frictionless economy, therefore, monetary exchange would have no advantage over barter
- An analysis of the role of money in economic equilibrium would thus require a theory of frictions
A firm had a role to play in the economic system if were possible for transactions to beorganized within the firm at less cost than would be incurred if the same
transactions were carried out through the market (VD: ngân hàng làm trung gian cho vay tiền và đi vay tiền)
About the optimal size of firms, an enterprise will tend to expand until the costs of
organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of an exchange on the open market or the costs of organizing in another firm.
Trang 10CHAPTER 2.2: PROPERTY-RIGHT ANALYSIS3.1.1.Why are property rights so important?
In a world of scarcity,
- The existence of physical objects and things → the need to regulate among men regarding the appropriation and use of things
- Allocations of property among individuals are indispensable
The question of whether ownership should be private (individual) or social(collective) was and is a hotly debated issue.
3.1.2 Property right is important, but how was it treated in economic analysis?
Property right (ownership) in classical economics (zero – transaction-costs) (tân cổ điển)
- Ownership is considered to be given (It is not an object of analysis!)
- It does not matter whether the factors of production are owned by their users - Consumers are able to determine in advance the stream of consumer goods, the
wish to enjoy at each moment of time
- All purchase contracts will be honored perfectly
→ ownership of resources matters
For example, imagine that:
It is costly to monitor a tenant under lease (or Transaction cost > 0) - The tenant, recognizing that he is not completely constrained
- The tenant will feel free to pursue his own interests, even though his actions may affect the landlord adversely
→ Private property right help to economize on tracsaction costs and thus contribute to
the economic welfare of society.
3.2 The property-rights analysis: Some basic concepts.
Following Roman law, the main elements of ownership: - The right to make physical use of physical objects - The right to the income from it
- The power of management, including that of alienation (chuyển nhượng) (Full ownership comprises these three rights)
The owner can make unlimited use of the object he owns (provided his action
does not conflict with other laws or with the rights of third parties)
Full ownership in physical objects can be fragemented or partitioned (phân chia) by transferring one or more of the three components of ownership to other persons.
The value of any property exchanged depends, on the bundle of property rights that can be conveyed in transaction.
Trang 11Property – right analysis and the nature of Economics
In essence, economics is the study of property rights over scarce resources Theallocation of scarce resources in a society is the assignment of rights to uses ofresources and the question of economics, or of how prices should be determined, is the
question of how property rights should be defined and exchanged, and on what terms - Property right and markets in property rights matter
- The market value of an asset and its allocation are “controlled” by its supply and demand
- Individuals compete on asset markets for ownership
→ The competitor is the best supervisor of the use of resources a society can find.
Each resource will go to the particular owner who expect the resources to yield the highest value.
Phân bổ nguồn lực có hiệu quả: giao nó cho người biết sử dụng nó nhất và làm ra lợi ích cao nhất
An efficient property regime is characterized by:
- The universality of property rights: every valuable resource were owned by someone
- The exclusivity of property rights: the power to exclude everybody else from using the resource (loại trừ người khác khỏi việc sd nguồn lực của mình)
- The tranferability of property rights: ownership rights were transferable, or alienale (quyền được chuyển nhượng)
→ Private ownership thus contributes, in an essential way, to the solution of the
economic problem of society: the efficient use of scarce resources
→Freely transferable private property plays a fundamental role in a market economy.
Intellectual property rights:
- Ownership in immaterial rights or intellectual property rights: Involved here are copyrights (literary, artistic, musical, …) trademarks, trade secrets, patents,… - Economic interest:
+ The services provided by intellectual works:…works of art or science.
+ The role of immaterial property rights in maintaining incentives to produce intellectual works
- The purpose of rights in the nonmaterial area is the same as that of material property rights.
- Different from matertial goods, some nonmaterial goods (or “knowledge”) are
nonrivalrous goods: “My knowing of what you know does not lessen yourknowing of the same thing”
Quiz? True - false
1 Property-right analysis is only applied to tangible asset (False ) 2 Private ownership is always the best option of the economy (False)
3 The state needs to own some important assets associated with national security (True)
Trang 124 The nature of exchange in the market is the exchange of ownership (True)
5 One of the important conditions for economic efficiency is the exclusivity of
Two cases of CPRs have to be distinguished:
- (1) The open – access CPR, in which no one has any property rights in the asset (e.g, in the waters of the open sea, the atmostphere, …)
- (2) The closed – access CPR, in which a well-defined group owns property in common (e.g, communally owned alpine meadows in the Swiss, Austrian and Bavarian Alps).
The tragedy of the Commons.
1st scenario: the classic private ownership solution
- The common grazing ground were owned by someone who could restrict access to it.
- The owner would purchase just the right amount of cows to maximize his profits.
- However, the transaction costs related to this solution (i.e, assigning costs, monitoring costs) are too high:
In fact, no single individual is in a position to bear full responsibility for this question.
2nd scenario: The grazing ground is owned by the villagers and each villager is free to
decide whether or not to use the common field
Problem: It will be profitable for each villager to graze an additional cow as long as the output produced by the cow is greater than the cost of the cow.
- Individuals in this case ignore social cost in their calculations, namely, that each extra cow will reduce the output of milk from all of the other cows.
- As a result, too many cows will be grazed on the common ground.
→ This tendency toward the misallocation of resources is called the tragedy of the
→ Extent to open-acces CPR: The “tragedy of the commons” has come to symbolize
the degradation of the environment whenever many individuals use a scarce resource in common.
Common ownership solutions may be preferable
Rules would have to be formulated about how many cows many graze on the village common + an institutional structure
- This institutional structure takes care of appropriation, provision, monitoring, enforcement, conflict resolution, and governance activities.
Example: The model of communal – property institutions related to land use Empirical evidence: