Department of
Economics
ECO (O) 1014(1):
INSTITUTIONAL ECONOMICS-I
Unit-II.
Preliminaries of the Old Institutional Economics 12
Lectures
The concept of Institutions in the old institutional economics; Adam
Smith’s “The Theory of the Moral Sentiments.”
The pragmatic philosophy of William James, Charles Peirce, John Dewey and Clarence Ayers; formation of habits, the rule of thumb, development of customs traditions and mores as regulators of social conduct; development of legal institutions.
TB Veblen: The Theory of the Leisure Class - informal institutions/habits and traditions,
government as part of the established, institutional system (vested interests),
proposal of a system of industrial planning by technical experts, Jungian
Archetypes and social psychology; R
Commons and JK Galbraith - formal (legalized) institutions, Scientific
investigation methods; WC Mitchell- Establishment of Institutions, National
Bureau of Economic Research (NBER), Statistical basis for study of
institutions, New School for Social Research, origins of agent-based
theory; G Myrdal – interdependence of
social, political, economic and institutional phenomena, modernization ideals.
Religion as an institution: Max Weber’s The Protestant Ethic and the
Spirit of Capitalism
Kenneth Boulding: Grants Economics; The three-fold
taxonomy of social organization
Unit-II.
Introduction to Institutional Analysis 11 Lectures
The concept of institution in the New Institutional Economics:
Institutions and organizations. Functions of social and economic institutions.
Interaction situations and the types of norms: prisoners' dilemma-type
situation; co-ordination situation; inequality situation. Enforcement
characteristics.
Institutional structure of a society. Formal and informal institutions.
Sanctions for disobeying norms (self-enforcing sanctions, guilt, shame,
informational sanctions, bilateral costly sanctions, multilateral costly
sanctions). Conditions of norms' effectiveness.
Interaction of formal and informal institutions. The limits of
imitations of institutions from best-performing countries. The problems of
their enforceability.
A Comparative view of the Old Institutional Economics and the New
Institutional Economics and modern institutionalism.
The concept of transaction. Market and
intra-firm transactions. Transaction costs as friction in the economy.
Transaction costs and transformation costs.
Interdependency between transaction costs and transformation costs.
Types of market transaction costs and means of transaction costs
minimization (search and information costs; measurement costs; bargaining and
decision costs; supervision and enforcement costs).
Comparative advantages and shortcomings of the legal enforcement
mechanism. Reputation as a contract enforcement device. Ideal model of
"perfect reputation". Shortcomings of the reputation as a contract
enforcement mechanism. Reputation and the "free rider problem".
Reputations aided by institutions.
Transaction costs, the main types of economic exchange and their
institutional structure. Coexistence of the main types of economic exchange in
the modern society.
Transaction cost
measurement.
Unit-IV. Economic Theory of Property Rights 11 Lectures
The definition of property rights. Property rights in different
Laws/traditions
The property rights approach: some basic concepts. Specification of
property rights, the bundle of rights, partitioning of property rights,
attenuation of property rights.
Assigning of property rights: the internalization of externalities. The
Coase Theorem. Critic of Coase (dynamic effects of alternative legal rules,
wealth effect, distributional effects, strategic behavior and the problem of
holding-out, endowment effect, sociological critic, unrealistic assumption
about zero transaction costs)
Alternative property rights regimes. Common property (open access) and
the tragedy of the commons. Exclusive property rights and the conditions for
their emergence. The first economic revolution. Communal property. Optimal
group size. Private property. Moral and economic aspects of private property.
Public property.
The emergence of property rights. The
optimistic theory of the emergence of property rights (naive model). The
interest-group theory of property rights. The costs of collective action. The
theory of rent-seeking. Interest-groups and rent-seeking behaviour in an
economy.
READING MATERIALS
FOR INSTITUTIONAL ECONOMICS-I
Main Reading:
Blaug, Marc, Economic
Theory in Retrospect, 3rd edn. Cambridge University Press, Cambridge and New
York: 1978
Supplementary Reading:Smith, Adam, The Theory of the Moral Sentiments, Edinburgh (1759) Available at http://www.adamsmith.org/smith/tms-intro.htmVeblen, TB, The Theory of the Leisure Class (1899). E-Version is Available at http://xroads.virginia.edu/~hyper/VEBLEN/veblenhp.htmlCommons, John,R, "Institutional Economics", American Economic Review, vol. 21 (1931), pp.648-657. Available at
http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/commons/institutional.txt
Boulding, Kenneth The Economy of Love and Fear: A Preface to Grants Economics. Belmont, Calif.: Wadsworth. 1973
Boulding, Kenneth, Adam Smith as an Institutional Economist. Memphis: P. K. Seidman. 1976
Wray, L. Randall, Kenneth Boulding's Grants Economics. Journal of Economic Issues, Vol. 28, 1994
Green, Adam, Matter and Pyche: Lewis Mumford's appropriation of Marx and Jung in his appraisal of the condition of man in technological civilization, History of the Human Sciences, Vol. 19, No. 3, 33-64, 2006
Weber, Max, The Protestant Ethic and the Spirit of Capitalism (1904-1905)(English Trans. Talcott Parsons, Anthony Giddens, London ; Boston : Unwin Hyman, 1930.) available at http://xroads.virginia.edu/~HYPER/WEBER/cover.html
Main reading:
C. Menard and M.
Shirley (eds.), Handbook of New Institutional Economics. Springer. 2005
Eggertson Thr. Institutions and Economic Behavior. Ch.1, pp.1-32.
Elster J. Social Norms and Economic Theory. 3 Journal of Economic Perspectives,
pp. 99-117 (1989).
North D. Institutions, Institutional Change and Economic Performance.
Cambridge University Press, 1990, Ch.5, 6, 7.
Posner R. Social Norms and the Law: an Economic Approach. 87 American
Economic Review, pp. 365-369 (1997).
Supplementary reading:
Сooter R. The Theory of Market Modernization of Law. 16
International Review of Law and Economics, pp. 141-172 (1996).
Ellickson R. The Aim of Order Without Law. 150 Journal of Institutional
and Theoretical Economics, pp. 97-100 (1994).
Eggertson Thr. Neoinstitutional Economics. In: Newman P. The New
Palgrave Dictionary of Economics and the Law. Vol. 2, pp. 665-670.
Guinnane T. A Failed Transplant: Raiffeisen Credit Cooperatives in
Ireland 1894-1914. p. 31 Exploration in Economic History, pp. 38-61 (1994)
Posner E. Efficient Norms. In : Newman P. The New Palgrave Dictionary of
Economics and the Law. Macmillan Reference, 1998, Vol. 2, pp. 20-24.
Posner E. Social Norms and the Law, Harvard University Press, Cambridge,
Mass., 2000; Ch.2 A Model of Cooperation and the Production of Social Norms.
Posner R., Rasmusen E. Creating and Enforcing Norms, with Special
Reference to Sanctions. International Review of Law and Economics, 1999, Vol.
19, pp. 369-382.
Ullman-Margalit E. The Emergence of Norms. Oxford, Clarendon Press,
1977. Ch.1, 2, 3,4.
Young P. H. The Economics of Convention. 10 Journal of Economic
Perspectives, pp. 105 -122 (1996).
Main reading:
Barzel Y. Measurement Cost and the Organization of Markets. 25 Journal of
Law and Economics, pp. 27-48 (1982).
Coase R. The Nature of the Firm. 4 Economica, pp. 386-405 (1937).
Dahlman C. The Problem of Externality. 22 Journal of Law and Economics,
pp. 141-162 (1979).
Milgrom P., Roberts J. Economics, Organization and Management. -
Prentice-Hall Int., 1992. Ch.2, pp. 19-35, Ch.5, pp.147-149, Ch.8, pp. 259-269.
North D. Institutions, Institutional Change and Economic Performance.
Cambridge University Press, 1990, Ch.8.
Supplementary reading:
Greif A. Contract Enforceability and Economic Institutions in Early
Trade: the Maghribi Traders Coalition. The American Economic Review, 1993, Vol.
83, №3, pp. 525-548
Niehans J. Transaction Costs. In: The Palgrave Dictionary of Economics.
London, Macmillan, 1987, pp. 676-679
North D. Institutions. 5 Journal of Economic Perspective, pp. 97-112
(1991).
North D. Integrating Institutional Change and Technical Change in
Economic History. A Transaction Cost Approach. 150 Journal of Institutional and
Theoretical Economics, pp. 609-624 (1994).
Williamson O. The Economic Institutions of Capitalism. The Free Press,
N.Y. 1985, Ch.2, pp. 43-67.
Main reading:
Coase R.H. The Problem of Social Cost. 3 Journal of Law and Economics
1-44 (1960).
Eggertson Thr. Institutions and Economic Behavior. Ch.2, pp. 33-78,
Ch.4, pp. 83-124, Ch.8, pp. 247-280, Ch.9, pp. 281-316.
Milgrom P., Roberts J. Economics, Organization and Management. Ch.9, pp.
288-307.
Varian H. Intermediate Microeconomics. A Modern Approach.4th ed. Ch.31.
Supplementary reading:
Coase, R.: The Lighthouse in Economics, 17(2) Journal of Law and
Economics, p. 357 (1974).
Cooter R. Coase Theorem. In: The New Palgrave: A Dictionary of
Economics. - L., Macmillan, 1987, pp. 457-459.
Demsetz H. Toward the Theory of Property Rights. American Economic
Review. 1967, Vol. 57, pp.349-359.
Demsetz H. When Does the Rule of Liability Matter? Journal of Legal
Studies , 1972, Vol. 1, N 1, pp.13-28.
Ellickson R. The Aim of Order Without Law. 150 Journal of Institutional
and Theoretical Economics, pp. 97-100 (1994).
Farnsworth W. Do Parties to Nuisance Cases Bargain after Judgment? A
Glimpse Inside the Cathedral, 66 University of Chicago Law Review, p. 373
(1999).
Hazlett D. Teaching Tools: a Common Property Experiment with a Renewable
Resource. Economic Inquiry. Vol. 35, Okt. 1997, N 4, pp. 858-861.
Libecap G. Common Property. In: Newman P. The New Palgrave Dictionary of
Economics and the Law. Vol. 1, pp. 317-324.
Olson M. Collective action. In: The New
Palgrave: A Dictionary of Economics. - L., Macmillan, 1987, pp. 474-477.
Olson M. The Logic of Collective Action. Public goods and the Theory of
the Groups. Cambridge: Harvard University Press. 1965.
Rose C. Evolution of Property Rights. In: Newman P. The New Palgrave
Dictionary of Economics and the Law. Vol. 2, pp. 93-98.
Tullock G. Rent-seeking. In: The New Palgrave: A Dictionary of
Economics. - L., Macmillan, 1987, pp. 147-149
ECO (O) 1014(2):
INSTITUTIONAL ECONOMICS-II
Unit-I: Theory of Contracts 12 Lectures
The definition of a contract. Legal and economic approach to contracts.
Freedom of contract.
Bounded rationality and contractual incompleteness. Asymmetric
information (hidden characteristics, hidden information/ hidden action, hidden
intentions) and opportunistic behavior. Adverse selection and the closing of
markets. Signalling, screening and self-selection. Asset plasticity and moral
hazard. Principal-agent problem and agency costs. A simple principle-agent
experiment in the classroom. Controlling and preventing moral hazard (controlling
the agent, incentive contracts, bonding, do-it-yourself method).
Attributes of transactions and the choice of a contract. Asset
specificity, types of specific assets. Synergy effects, quasi-rents
appropriation and hold-up problem. Classification of contracts (classical,
neoclassical and relational contracting). Discrete alternative governance
structures: market, hybrids and hierarchy. Self-enforcing agreements (Telser)
and hostages (Williamson).
Hybrids: specific
assets and their safeguards.
Institutional environment and its role in the choice of contract.
The role of trust. Economic approach to trust. Kreps: the trust game.
Types of trust (contractual trust, competence trust and good will trust).
Explaining the internal structure of formal organizations: transaction
costs approach.
Unit II: The New Institutional Theory of the Firm 12 Lectures
Neoclassical theory of the firm. Explanations
of the firm in the new institutional theory (F.Knight, R. Coase, A. Alchian and
H.Demsetz, O.Williamson, O.Hart).
The market and the firm. Comparative analyses of the alternative
coordination forms. Internal market and influence costs. The boundaries of the
firm.
Ownership structure of the firm. A theory of the owner-monitor (Alchian
and Demsetz, 1972).
Competing forms of economic organization, relative advantages of
alternative structures (proprietorships, partnerships, open corporation,
regulated firms, public enterprises, nonprofit organizations, labor-managed
firms).
Separation of ownership and control in the open corporation.
Opportunistic behavior of the managers and corporate control. Outsider and
insider corporate governance. Privatization (Liberalization and Globalization)
in India (and other transition economies): how to control the managers.
Unit-III: The Theory of Institutional Change 11 Lectures
Stability of institutions and institutional change. The concept of
institutional equilibrium. The main sources of institutional change.
Centralized and spontaneous institutional change. The role of the state in the
process of institutional change. The problem of compensation of the
disadvantaged groups.
Theories of selection of efficient institutions in the process of
competition (Alchian, Friedman). Institutional change and path dependence.
Forms of path-dependence (weak form, semi-strong and strong forms).
Institutional changes in contemporary India.
Unit-IV: The New Institutional Theory of the State 11 Lectures
Social mechanisms for constraining open access. Contractual theories of the state (Locke, Rousseau), Hobbes predatory theory of the state. North's model of the state. The regulatory role of the state in the Indian economy.
The legal system in the institutional
framework; Philosophy of jurisprudence before utilitarinism; Formalism and
legal realism; Legal Pragmatism;
Utilitarian basis of justice and jurisprudence; Analytic jurisprudence; Legal
positivism; normative theories; Feminist jurisprudence; Law and the economy;
Posner’s Moral relativism.
Corruption and its economics: the principal-agent framework; incentive structures; the threat system and the authority; collusion, preemptive collusion and ex-post collusion; Rent-seeking behavior and free-riding. Rent-seeking in teams. Rent-seeking in hierarchical systems; Basil model of corruption and its analysis. Classification of Corruption models. Game-theoretical approaches towards corruption study. Corruption in hierarchical structures. Dynamic corruption models. Welfare implications of corruption.
READING MATERIALS
FOR INSTITUTIONAL ECONOMICS-II
Main reading:
Akerlof G.A. The Markets for "Lemons": Quality Uncertainty and
the Market Mechanism" 84 Quarterly Journal of Economics, pp. 488-500
(1984).
Eggertson Thr. Institutions and Economic Behavior. Ch.6, pp. 170-175.
Milgrom P., Roberts J. Economics, Organisation and Management. Ch.5, pp.
126-166, Ch.6, pp. 166-205, Ch.8, pp. 269-279, Ch.9, pp. 307-313, Ch.16, pp.
538-584.
Joskow P. Contract Duration and Relationship-Specific Investments:
Empirical Evidence from Coal Markets. 77 American Economic Review pp. 168-173
(1987).
Supplementary reading:
Alchian A., Woodward S. Reflections on the Theory of the Firm. Journal
of Institutional and Theoretical Economics, 1987, Vol.143, pp.110-136.
Brinig M. Rings and Promises. 6 Journal of Law, Economics and
Organization, 129-141(1990).
Klein B. Fisher-General Motors and the Nature of the Firm. 43 Journal of
Law and Economics, pp. 103-141(2000).
Klein B., Crawford R., Alchian A. Vertical Integration, Appropriable
Rents and the Competitive Contracting Process. Journal of Law and Econoics,
1978, Vol. 21, pp. 297-326.
Kreps D. Corporate Culture and Economic Theory. In: Perspectives on
Positive Political Economy. Cambridge: Cambridge University Press, 1990.
Menard C. Inside The Black Box: The Variety of Hierarchical Forms. In:
Transaction Cost Economics and Beyond. ed. Groenewegen J. L., Kluwer Academic
Publishers, pp.149-170.
Menard C. On Clusters, Hybrids and Other Strange Forms: The Case of
French Poultry Industry 152 Journal of Institutional and Theoretical Economics,
1996, pp. 154 -183 (1996).
Ortmann A., Colander D. Teaching Tools. A Simple Principal-Agent
Experiment for the Classroom. Economic Inquiry, 1997, Vol. 35, April, N 2, pp.
443-450.
Shelanski H., Klein P. Empirical Research in Transaction Cost Economics:
A Review and Assessment. Journal of Law, Economics and Organization, 1995, Vol.
11, N 2., pp.335-361.
Williamson O. Comparative Economic Organization: The Analyses of
Discrete Structural Alternatives. In: Mechanisms of Governance, Oxford
University Press, 1996.
Williamson O. The Economic Institutions of Capitalism. The Free Press,
N.Y. 1985, Ch.1-3, pp. 15-85.
Main reading:
Coase R. The Nature of the Firm. 4 Economica, pp. 386-405 (1937).
Alchian A., Demsetz H. Production, Information Costs and Economic 52 The
American Economic Review, pp. 777-795 (1972).
Eggertson Thr. Institutions and Economic Behavior. Ch.6, pp.157-190.
Hart O. An Economist's Perspective on the Theory of the Firm. 89
Columbia Law Review, p. 1757 (1989)
Milgrom P., Roberts J. Economics, Organization and Management. Ch.9, pp.
313-325, Ch.15, pp. 482-527.
Supplementary reading:
Chеung S. The Contactual Nature of the Firm, Journal of Law and
Economics, 1983, Vol. 26, pp.1-21.
Demsetz H. The Emerging Theory of the Firm. Uppsala, 1992
Fama E., Jensen M. Agency Problems and Residual Claims. 26 Journal of
Law and Economics, pp. 327-349 (1983).
Jensen M., Meckling W. Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure. 3 Journal of Financial Economics, pp. 305-360
(1976).
Наrt O. Norms and the Theory of the Firm. University of
Pennsylvania Law Review. University of Pennsylvania Law Review, 2001, Vol. 149,
pp.1701-1715.
Manne H. Mergers and the Market for Corporate
Control. 73 Journal of Political Economy, p. 110 (1965).
Schleifer A., Vishny
R. 1997 A Survey of Corporate Governance. 52 Journal of Finance, p. 737 (1997).
Main reading:
North D.
Institutions, Institutional Change and Economic Performance. Cambridge
University Press, 1990, Ch. 9-14.
Supplementary reading:
Bebchuk L. and M. Roe, A Theory of Path
Dependence in Corporate Ownership and Governance 52 Stanford Law Review pp.
127-70 (2000);
Bromley D.
Institutional Change and Economic Efficiency. Journal of Economic Issues, Vol.
23, No. 3, September 1989.
David P. Clio and the
Economics of QWERTY.75 American Economic Review. Papers and Proceedings
pp.332-337 (1985).
Margolis S., Liebowitz S. Path Dependence. In:
Newman P. The New Palgrave Dictionary of Economics and the Law. Vol. 3,
pp.17-22.
Roe M. Chaos and Evolution in Law and
Economics. Harvard Law Review, 1996, Vol. 109, pp. 641-658.
Main reading:
Eggertson Thr.
Institutions and Economic Behavior. Ch.9-10, pp.281-358.
Venjanovski, C., The Economics of Law, The Institute of Economic Affairs and Profile
Books Ltd, London, 2006 (2nd Ed) Available at
http://www.iea.org.uk/files/upld-book391pdf?.pdf
Rose-Ackerman, Susan,
Handbook on the Economics of
Corruption, Edward Elgar
Publishing Inc, Northampton, MA, 2006
Supplementary reading:
McGuire M., J Olson M. The Economics of
Autocracy and Majority Rule: The Invisible Hand and the Rule of Force. Journal
of Economic Literature, 1996, Vol. 34 March, pp.72-96.
North D. Structure
and Change in Economic Theory. N.Y. and London: Norton, 1981. Ch.3.
Rodrik, Dani, Arvind Subramanian, and Francesco Trebbi, "Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development" August 2002.
http://ksghome.harvard.edu/~.drodrik.academic.ksg/papers.html
Knack, Stephen and
Philip Keefer (1997) “Why don’t poor countries catch up? A cross national test
of an institutional explanation” Economic Inquiry 35.
Robert Hall and
Charles I. Jones “Why Do Some Countries Produce So Much More Output per Worker
than Others?” The Quarterly Journal of Economics, vol. 114, no. 1, pp. 83-116,
February 1999. Available also as NBER Working Paper No. W6564 (http://papers.nber.org/papers/W6564.pdf.)
Rodrik, D. 2000
"Institutions for High-Quality Growth: What They are and How to Acquire
Them", NBER Working Paper No. W7540. Available at http://papers.nber.org/papers/W7540.pdf.
Greif, Avner “Commitment, Coercion and Markets: The Nature and Dynamics of Institutions Supporting Exchange” in C. Menard and M. Shirley (eds.), Handbook of New Institutional Economics. Springer. 727–786. 2005
Available at http://www-econ.stanford.edu/faculty/Greif_Papers/Commitment_Coercion_Markets.pdf
Andrew,
Samuel, Essays on the economics of corruption, Ph.D. dissertation, Boston College,
2005, 108 pages; AAT 3176675 http://proquest.umi.com/pqdlink?Ver=1&Exp=03-11-2013&FMT=7&DID=920928101&RQT=309&attempt=1&cfc=1
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