Market Rules, SSP Chart, De Soto,

Contrasting Conceptions of the Functions of Institutions: Constraints vs. Enablement and Giving Direction to Interdependencies.

(DeSoto conducts an experiment by pretending to establish a garment factory.)

Situation Structure Performance
Good = clothing manufacture.

Sewing factory "experiment"

Gains from trade.

Individual rationality

Institutions as Constraints-

1. "Red Tape" created by requiring government permits

2. Answer is to abolish it to get gains from trade

1. Empirical "experimental" result: Creates opportunity for officials to collect a private tax. Time is wasted in getting permits. Or is it??

2. Some still poor. Little specialization.

Work place hazzards?

Economies of scale.

Complex gods.

Inherent transaction cost to pool labor, capital, ideas, and to trade at a distance.


Specific assets.

Institutions as Enablement-

3. Family, reputation, personal trust and threat.

4. Contract enforcement.

Limited liability.

Integrated firms. Judges are not individual profit maximizers (status)

3. Small scale. Risk is concentrated. Little invest-

ment in specific assets. Markets are thin and local.

4. Pooling of capital, diversi-

fication, convert debt to shares, spread risk

Markets extended.

Good = Urban buses & pedestrians using the street.

IUG at high speed.

Inst. As enablement and inter-

dependence direction--

5. Informal sector, competition among private jitneys--

A. No liability for damages.

B. No permits required.

6. Formal sector.

Law is not just red tape but provides opportunity for pedestrians.

A. Judicial liability decisions

B. Regulation and permits.

C. Delegate to informal organizations (NGO's?) Maybe the bus drivers association sets standards for its members.

5. Jitneys hit pedestrians.

6. Reduced accidents, and when they happen the cost is spread.

A. De Soto predicts good results.

B. See # 1 above.

C. ?