Readings Flashcards
(17 cards)
Core Premises of New Institutional Economics (NIE) [Williamson]
Institutions shape economic performance and are studied through an interdisciplinary approach combining law, economics, and organizational theory. Transaction Cost Economics (TCE) focuses on minimizing the cost of governing transactions, recognizing that markets do not operate without friction.
Institutional Levels [Williamson]
Institutional Environment – Macro-level rules such as constitutions, property rights, and legal systems that set the broader framework for economic interactions.
Institutions of Governance – Micro-level structures like markets, firms, and hybrid arrangements that organize economic transactions efficiently.
Transaction Cost Economics (TCE) [Williamson]
Governance structures exist to manage transaction costs, which arise due to:
Bounded Rationality – Individuals have limited cognitive capacity to process all relevant information.
Opportunism – Some parties act strategically or deceptively to maximize their own benefit.
Uncertainty – Future contingencies cannot be fully anticipated, leading to contract incompleteness.
Governance Structures [Williamson]
Markets – Best for standardized, low-asset-specific transactions where competitive pricing mechanisms are effective.
Hierarchies (Firms) – Used when coordination is necessary, particularly for transactions involving high asset specificity.
Hybrids – Governance models like joint ventures, franchises, or strategic alliances that mix elements of market and hierarchy.
Key Concepts in Governance [Williamson]
Incomplete Contracts – No contract can account for all possible future contingencies, requiring flexibility and enforcement mechanisms.
Credible Commitments – Mechanisms that ensure parties stick to their agreements, reducing opportunism.
Asset Specificity – The degree to which an investment is customized for a specific transaction, making alternative uses costly or impossible.
Neoclassical vs. Institutional Economics [Session 3&4 Notes]
Neoclassical Economics assumes rational actors, perfect information, and no transaction costs, leading to frictionless markets.
Institutional Economics acknowledges bounded rationality, imperfect markets, and the role of institutions in shaping economic behavior.
Supply & Demand in Institutional Economics [Session 3&4 Notes]
While standard economics focuses on price and quantity adjustments, institutional factors like contracts, legal frameworks, and enforcement mechanisms play a crucial role in determining actual market outcomes.
Transaction Costs & Economic Behavior [Coase]
Market transactions are not costless; firms and institutions exist to reduce transaction costs and improve efficiency.
Firms replace markets when the cost of using price mechanisms (searching, negotiating, and enforcing contracts) exceeds the cost of internal organization.
Critical Dimensions of Transactions [Session 5 Notes]
Uncertainty – When market conditions and costs cannot be predicted, leading to more complex governance structures.
Recurrence – Frequent transactions justify investment in specialized governance mechanisms.
Asset Specificity – Higher specificity leads to a preference for hierarchical control to safeguard investments.
Common Law vs. Statute Law [Stigler]
Common Law – Evolves through judicial precedents and case rulings, adapting to economic needs over time.
Statute Law – Codified legal frameworks established by legislation, often rigid and requiring periodic updates.
Coase Theorem [Stigler]
If transaction costs are zero, private negotiations will lead to efficient outcomes regardless of legal property rights.
In reality, transaction costs exist, necessitating institutional interventions to facilitate efficiency.
Market Failures & Government Interventions [Session 5 Notes]
Governments intervene through taxes, subsidies, and regulations to correct inefficiencies caused by externalities, public goods, and information asymmetries. These interventions shape institutional environments.
Governance Choice Determinants [Williamson]
Asset Specificity – Higher specificity favors hierarchical governance to protect investments.
Transaction Frequency – More frequent transactions justify structured governance mechanisms.
Uncertainty – Greater unpredictability increases the need for relational contracts and enforcement mechanisms.
Institutions & Economic Development [Session 9 Notes]
Economic divergence between Latin America and North America can be attributed to differences in factor endowments, property rights, and governance structures, leading to varied economic growth trajectories.
Inclusive vs. Extractive Institutions [Session 13-14 Notes]
Inclusive Institutions – Promote economic growth by ensuring equal participation, property rights, and fair competition.
Extractive Institutions – Concentrate power and wealth, suppressing competition and limiting innovation.
Institutional Path Dependence [Session 12 Notes]
Institutions tend to self-reinforce, making change difficult without major political or economic disruptions.
Historical conditions and critical junctures shape long-term institutional trajectories
Relational Contracting [Session 9 Notes]
As transactions become longer and more complex, traditional contract enforcement mechanisms lose effectiveness.
Corporate governance, collective bargaining, and international trade agreements often rely on relational norms instead of rigid legal contracts.
