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Professor of Economics Institute of Behavioral Science University of Colorado

The New Institutional Economics: Its Roots, Growth and Future. Lee J. Alston. Professor of Economics Institute of Behavioral Science University of Colorado. What is the NIE?. 1) Interdisciplinary 2) Comparative

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Professor of Economics Institute of Behavioral Science University of Colorado

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  1. The New Institutional Economics: Its Roots, Growth and Future Lee J. Alston Professor of Economics Institute of Behavioral ScienceUniversity of Colorado

  2. What is the NIE? 1) Interdisciplinary 2) Comparative 3) Set of concepts, e.g., property rights, agenda control, credible commitment… 4) Different levels of analysis, e.g., causes and consequences of institutions

  3. Figure 1 Institutions and Economic Performance Government Informal Institutions (Norms of Society) Formal Institutions (Laws of Society) Property Rights Technology Transaction Costs Transformation Costs Costs of Exchange Costs of Internal Production Contracts Economic Performance

  4. Figure 2 The Determinants of Formal Institutions Economic Performance Special Interests Citizens/Consumers Winners Losers Prime Minister Committees Executive Government Legislature Parties President Laws Bureaucracies Judiciary Independent and Honest Competent and Honest

  5. Southern Paternalism and the American Welfare State • Paternalism was an implicit contract: - workers exchanged good and faithful labor for a variety of in-kind goods and services

  6. Demand and Supply of Paternalism • Demand by workers: - resulted from the discrimination • Supply by landlords: - high labor monitoring costs with pre-mechanized agriculture. • Level of analysis at this point: - examines contracting given institutions.

  7. Who Determined the Institutions? • Political power: agricultural elite • Political Power of Southerners: - one-party system in the South resulted in seniority; and pivotal ideological position

  8. Institutional Results • Little change in welfare policy, labor policy, civil rights or voting rights until the 1960s • Why the 1960s? - mechanization of cotton production • Southerners abandoned paternalism; allowed federal welfare state to expand; and sharecropping disappeared

  9. NIE: What do we know? Contracting: linkages among institutions, property rights, transaction costs and contracts Political Economy: roles played by legislative institutions and special interests in shaping the laws of society Both have been absorbed into the mainstream of Neo-Classical Economics

  10. NIE: What Don’t We Know? Staying Ahead of the Mainstream • We know too little about the origins of norms and how they shape outcomes • We need a better understanding of institutional path dependence in the presence of poor economic outcomes - the dynamics of institutional change

  11. Why institutional path dependence? • Informational problems abound What can we learn from: - cognitive psychology and experimental economics? - empirical studies of insufficient political competition and insufficient media competition

  12. Why Institutional Path Dependence? • Disapproval of the outcome but approval of the process that generated the outcome. Trapped? - role of political entrepreneurs • Serious collective action problems - role of political entrepreneurs 4. Insecure “political” property rights

  13. Why Do We Want Insecure Political Property Rights? • Transparent side-payments would undermine the legitimacy of government. • Discourages politicians from making “bad” policy in order to be bought out.

  14. Why Do We Want Secure Political Property Rights? • It would enable more credible commitment among politicians • It would stabilize policy - bright side and dark side of policy stability

  15. Overcoming Institutional Path Dependence: Achieving Economic Development • Political Entrepreneurship - Cardoso in Brazil vs Chavez in VZ - Someone who plays for the history books - Strong but checked executive powers? • The Role of Crises - Gives more latitude for political entrepreneurship - Greater scope for action can be positive or negative

  16. How do we make headway in the NIE? • Continue what we are doing which requires insights from anthropology, economics, history, law, psychology, political science and sociology • Orchestrated case studies over time of successful and unsuccessful institutional change such that we can begin to make some generalizations

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