Upload
alvin-nigel-lambert
View
221
Download
0
Tags:
Embed Size (px)
Citation preview
InstitutionsInstitutions
The Coase Theorem – The Link to The Coase Theorem – The Link to InstitutionsInstitutions Institutions and Economic Institutions and Economic PerformancePerformance
The Static CaseThe Static CaseThe Dynamic CaseThe Dynamic Case
The Polity as Creator of The Polity as Creator of InstitutionsInstitutions
The Coase Theorem – The The Coase Theorem – The Link to InstitutionsLink to Institutions
Economic EfficiencyEconomic Efficiency Neoclassical economic theory Neoclassical economic theory usually usually
works with following implicit works with following implicit assumption:assumption: the process of exchange is the process of exchange is costlesscostless = = transaction costs transaction costs are zero are zero
In this case the best things are:In this case the best things are: Perfect Competition Perfect Competition Laissez-faireLaissez-faire
The Coase Theorem – The The Coase Theorem – The Link to InstitutionsLink to Institutions
Transaction CostsTransaction Costs Negotiation CostsNegotiation Costs Measurement CostsMeasurement Costs Costs of Enforcing ExchangesCosts of Enforcing Exchanges
Decreasing transaction costs Decreasing transaction costs increases market efficiencyincreases market efficiency
The Coase Theorem – The The Coase Theorem – The Link to InstitutionsLink to Institutions
Asymmetric InformationAsymmetric Information increases increases measurement costsmeasurement costs
Reputation, Repeated Dealings and Reputation, Repeated Dealings and Competition decrease Competition decrease Costs of Enforcing Costs of Enforcing ExchangesExchanges
The Coase Theorem – The The Coase Theorem – The Link to InstitutionsLink to Institutions
Coase TheoremCoase Theorem With zero transaction costs, the With zero transaction costs, the
efficient outcome always prevails efficient outcome always prevails regardless of property rights regardless of property rights assignmentsassignments
If transaction costs are positive, If transaction costs are positive, property rights assignments have a property rights assignments have a big impact on economic outcomesbig impact on economic outcomes
The Coase Theorem – The The Coase Theorem – The Link to InstitutionsLink to Institutions
Question for discussion:Question for discussion: Suppose someone enters a room full of Suppose someone enters a room full of
people and begins to smoke a cigarette, people and begins to smoke a cigarette, generating a negative externality. generating a negative externality. Smoking is allowed in this room. What Smoking is allowed in this room. What sort of agreement must be reached in sort of agreement must be reached in order to eliminate the externality? What order to eliminate the externality? What are the transaction costs that make it are the transaction costs that make it difficult to reach such an agreement?difficult to reach such an agreement?
Institutions and Economic Institutions and Economic Performance - The Static Performance - The Static
CaseCase
Institutions and Economic Institutions and Economic Performance - The Static Performance - The Static
CaseCase A nation’s institutional framework, the A nation’s institutional framework, the
complex network of rules, customs complex network of rules, customs and enforcement systems, determines and enforcement systems, determines transaction coststransaction costs
A well functioning economy requires a A well functioning economy requires a well functioning governmentwell functioning government
Formal rules impact on measurement Formal rules impact on measurement and enforcement costsand enforcement costs
Institutions and Economic Institutions and Economic Performance - The Static Performance - The Static
CaseCase Informal rules – four fundamental Informal rules – four fundamental
cultural factorscultural factors Society’s radius of trustSociety’s radius of trust The rigor of the ethical systemThe rigor of the ethical system The way in which authority is exercisedThe way in which authority is exercised Society’s attitudes regarding work, Society’s attitudes regarding work,
innovation, saving and profitinnovation, saving and profit
Institutions and Institutions and Economic Performance - Economic Performance -
The Dynamic CaseThe Dynamic Case
Institutions and Institutions and Economic Performance - Economic Performance -
The Dynamic CaseThe Dynamic Case Three key elements of the Three key elements of the
development and integration of new development and integration of new technologytechnology
1.1. A nation must foster human creativityA nation must foster human creativity Freedom and incentives to think about and Freedom and incentives to think about and
experiment with new ideasexperiment with new ideas Society must be open to change and Society must be open to change and
willing to deal with the disruptions in the willing to deal with the disruptions in the status quo that the new technology bringsstatus quo that the new technology brings
Institutions and Economic Institutions and Economic Performance - The Performance - The
Dynamic CaseDynamic Case2. A well functioning capital market2. A well functioning capital market
3. Competitive environment that forces 3. Competitive environment that forces firms to continually improve their products firms to continually improve their products or risk being forced out of businessor risk being forced out of business Joseph Schumpeter in the early 1940s – The Joseph Schumpeter in the early 1940s – The
process of creative destructionprocess of creative destruction A successful economy must be adaptively A successful economy must be adaptively
efficientefficient Perfect competition is not necessarily optimal Perfect competition is not necessarily optimal
for creative destructionfor creative destruction Complementarity of macro and micro Complementarity of macro and micro
inventionsinventions Institutions themselves cannot be stagnantInstitutions themselves cannot be stagnant
Institutions and Economic Institutions and Economic Performance - The Performance - The
Dynamic CaseDynamic Case The persistence of poor economic The persistence of poor economic
performanceperformance: path-dependency – : path-dependency – Why?Why? Informal institutions evolve very Informal institutions evolve very
slowly over timeslowly over time
Institutions and Institutions and Economic Performance - Economic Performance -
The Dynamic CaseThe Dynamic Case Questions for discussion:Questions for discussion:
Think of some example how an inferior Think of some example how an inferior technology has won out over a superior technology has won out over a superior technology. Explain why this has technology. Explain why this has happened.happened.
Can you rank countries according to the Can you rank countries according to the level of institutions?level of institutions?
The Polity as Creator of The Polity as Creator of InstitutionsInstitutions
Government strong enough to Government strong enough to protect property rights and enforce protect property rights and enforce contracts is also strong enough to contracts is also strong enough to confiscate the wealth of its citizensconfiscate the wealth of its citizens
Contract Theory x Predatory TheoryContract Theory x Predatory Theory The Role of Time Horizon – A Time The Role of Time Horizon – A Time
Inconsistency (Dynamic Inconsistency (Dynamic Inconsistency) ProblemInconsistency) Problem
The Polity as Creator of The Polity as Creator of InstitutionsInstitutions