Institutional & Behavioral Economics

Fall Semester, 2006, AEC-EC-CARRS 810

Prof. David Schweikhardt (schweikh@msu.edu)

Prof. A. Allan Schmid (schmid@msu.edu)

Institutions, behavior, performance. Collective action, public choice, property rights, agency, transaction-information costs, behavioral theory of the firm-consumers-government, externalities, income distribution, order, evolution, learning, uncertainty, legitimation, altruism.


Texts:
A. Schmid, Conflict and Cooperation: Insitutional & Behavioral Economics, Blackwell, 2004. (C&C)

D. North, Institutions, Institutional Change & Economic Performance. Cambridge, 1990.

A. Hirschman, Exit, Voice and Loyalty. Harvard, 1970.

S. Bowles, Microeconomics: Behavior, Institutions, and Evolution, Princeton, 2004. (Recommended, not required)

A. Schmid, Study Notes, available on the web. http://www.msu.edu/course/aec/810/studynotes.htm. Also "Rough Guide."

Course pack of material not available electronically is available at Budget Printing.

I. INTRODUCTION TO INSTITUTIONAL ECONOMICS

1. The Big Picture ---------------------------------------------------------------------------------Aug. 28

Framework for analysis of connection between choice-coordinating institutions and the performance of the economy. Alternatives range from the market with alternative property and contract rules to government enterprise and commands. Role of formal and informal institutions.

2. Property as Power and as Economizing--------------------------------------------------- Aug. 30 (Powerpoint outline)

Institutions as constraints and as enabling. How paradigms affect what you see, what you question.

a. Schmid, C&C, Preface and Ch. 1, "Introduction," --Also see Foreward by Warren Samuels

b. Eggertsson, Thrainn, Economic Behavior and Institutions. (1990), Ch. 1. Also see Foreword and Preface.

c. Galbraith, J. K. "Power & the Useful Economist, AER 1976. (Available JSTOR)

d. Bowles, Prologue.

3. Power, Cost, and Political Economy--------------------------------------------------------- Sept. 6(Powerpoint)

Cost as a function of institutions. Demand as a function of income distribution.

a. Schmid, C&C, Ch. 2, "Institutional & Behavioral Economics Theory."

b. Samuels, Warren, "The Legal-Economic Nexus," George Washington Law Review, 57:1556-1578 (1989). (web-Main Library-electronic resources)


II. INSTITUTIONAL ECONOMICS THEORY

Variables and relationships identified by theory.

4.. Behavioral Concepts: Learning, Reinforcement and the Environment ---------- Sept. 11 (Powerpoint)

a. Schmid, C&C, Ch. 3, "Behavioral Economics."

b. Margolis, Howard, Patterns, Thinking and Cognition, (1987) excerpts. (Optional for fun.)

c. Gazzaniga, Michael, The Social Brain, (1985) pp. 67-80. (Optional for fun.)

5. Cognition and Choice (and review)---------------------------------------------- Sept. 13 (Powerpoint)

a. Camerer, Colin, et. al., "Neuroeconomics: How Neuroscience Can Inform Economics," J. Econ. Literature, March (2005).

b. Bowles, Ch. 3, "Preferences and Behavior" (browse)

6. Behavioral Economics --------------------------------------------------------------------Sept. 18 (Powerpoint)

a. Arrow, Kenneth, "Rationality of Self and Others in an Economic System," in Hogarth and Reder, eds., Rational Choice (1987).

b. Simon, Herbert, "Rationality in Psychology and Economics," in Hogarth and Reder, eds. Rational Choice (1987).

c. Sen, A. "Rational Fools: A Critique of the Behavioral Foundations of Economic Theory," Ch. 4. in his Choice, Welfare and Measurement, (1982).

7. Domain of Institutional Analysis ---------------------------------------------------------Sept. 20 (Powerpoint)

Interdependence of the individual and society. Individuals, organizations and institutuions in process.

a. Schmid, C&C, Ch. 4, "Individuals and Institutions" and Ch. 5, "Institutions and Organizations."

b. Hodgson, Geoffrey, "The Approach of Institutional Economics," Journal of Economic Literature, 36(1): 166-192 (1998). (Available JSTOR)

c. Potts, The New Evolutionary Microeconomics, 2000, See review by Schmid in the Economic Record, March, 2003.(optional for fun.)

d. Simon, Herbert, "The Failures of Armchair Economics," Challenge, Nov.-Dec. 1986, pp. 18-25. (Optional for fun.)

8. Incompatible Use and Exclusion Cost-----------------------------------------------Sept. 25 (Powerpoint)

How do characteristics of goods and people affect human interdependence and the possibility of Alpha's choices to affect Beta? How do alternative rights shape the distribution of the consequences of this interdependence?

a. Schmid, C&C, Ch.6, Sections 6.1, 6.2 & 6.3, "Incompatibility" and "Exclusion Cost."

b. Olson, Mancur, The Logic of Collective Action, (1965) Ch. 1.

c. Hirschman, A. O., Getting Ahead Collectively, (1984) pp. 42-49. (Optional for fun.)

 9. Behavior that Depends on Behavior of Others  -----------------------------------------Sept. 27 Powerpoint

a. Schelling, T., Micromotives and Macrobehavior. (1978), Chs.1, 2, and 7.

10. Prisoner's Dilemma and Other Games-----------------------------------------------------Oct. 2 Powerpoint

a. Bowles, Ch.1. "Social Interaction and Institutional Design"

b. Schmid, C&C, re-read section 6.3.1 & 6.3.2.

b. Schmid, Property, Power, and Public Choice, (1987) Ch. 8, pp. 172-9, "Social Traps". (on course web page) (Optional)

11. Increasing Returns ------------------- ----------------------------------------------------------Oct. 4 Powerpoint

a. Schmid, C&C, Ch. 6, Section 6.5, "Economies of Scale."

b. Arthur, Brian, "Positive Feedbacks in the Economy," Scientific American, Feb. 1990, 92-99.

c. Skott, Peter, "Cumulative Causation," in Elgar Companion to Institutional and Evolutionary Economics, G. Hodgson, ed. (1994) pp. 119-22.

12. Non-Rival Goods (Marginal cost = zero) ---------------------------------------------------Oct. 9 Powerpoint

a. Schmid, C&C, Ch.6, Section 6.4, "Non-Rival Goods."

13. Transaction Costs----------------------------------------------------------------- Oct. 11 Powerpoint

a. Schmid, C&C, Ch. 6, section 6.7, "Transaction Costs." (Omit 6.7.4 & 6.7.5)

b. Williamson, Oliver. "The Lens of Contract," American Economic Review, 92(2):438-43 (2002) (available from JSTOR), or Williamson, The Economic Institutions of Capitalism, 1985. Ch. 1, "Transaction Cost Economics."

14. Uncertainty and Information Processing Costs------------------------------------------Oct. 16 Powerpoint

a. Schmid, C&C, section 6.7.4, "Risk & Fundamental Uncertainty," and 6.7.5, "Evolutionary & Competence Based Theory of the Firm." Recall section 4.3, "Uncertainty."

b. Potts, Jason, The New Evolutionary Microeconomics, 2000. Ch 7, "Theory of Expectations."

c. Littlechild, S. "Three Types of Market Process," Economics As A Process, Langlois, ed. (1989). (Optional)

15. Institutions & Organizations ------------------------------------------------------------------Oct. 18 Powerpoint

a. Schmid, C&C, section 5.3 "Organizations (firms), Institutions and Boundaries"

b. Simon, H. "Organizations and Markets," J. Econ. Perspectives, 5:25-44 (1991). (Available from JSTOR)

c. Hodgson, G. "Evolutionary & Competence-Based Theories of the Firm," Evolution and Institutions, (1999), 247-275.

d. Schmid, C&C, section 6.7.5, "Evolutionary & Competence Based Theory of the Firm."

16. Institutional Change (1) ------------------------------------------------------------------------Oct. 23 Powerpoint

a. Schmid, C&C, Ch 13, "Institutional Change Analysis."

b. Castells, M. The Power of Identity (2004) Identity & Meaning in the Network Society, pp. 5-29. (Optional, main library reserve.)

17. Institutional Change (2) ------------------------------------------------------------------------Oct. 25 Powerpoint

a. North, D. Institutions, Institutional Change and Economic Performance, (1990)

b. Bowles, Chs. 11-13 (optional, see study notes)

18. Paradigm Restated  ------------- ------------------------------------------------- Oct. 30--EXAM

a. Schmid,C&C, review Table 6.19.

b. "Forty Concepts:" and "Paradigm Comparisons" (on the web)

c. "SSP Impact Methodology" journal file. (on the web)

d. A good review vehicle is Ch. 2 in Samuels and Schmid, eds. Law and Economics. (optional)


III. WHAT IS THE BEST INSTITUTION?

19. Exit, Voice, or Loyalty --------------------------------------------------------------------Nov. 1 Powerpoint

a. Hirschman, Albert, Exit, Voice and Loyalty, (1970) pp. 1-126.

b. Recall C&C, Table 6.5 "Exit, voice, and loyalty" and Table 6.13, "Transaction Costs ala Hirschman."

20. Normative Rules for Choice Among Alternative Institutions---------------------Nov. 6 Powerpoint

a. Schmid, C&C, re-read 5.5.2 "Specifying Performance Variables" or alternatively, Property, Power and Public Choice (1987) Ch. 11, ("Rules for Choice")

b. Bromley, D. "Rethinking Markets," Amer. J. of Agr. Econ., 79(5):1383-1393 (1997)

c. Calabresi, Guido, Ideals, Beliefs, Attitudes and the Law, (1985) pp. 1-2, Ch. 3, "The Beliefs of a Reasonable Person," and p. 69 and pp. 84-85.

d. Breimyer, Harold, "Government 'Intervention': A Deceptive Label," Choices, 2nd Quarter 1991, p. 3. (Optional for fun.)

21. "Is There a Better 'ole To Go To"? ----------------------------------------------------Nov. 8 Powerpoint

a. Robinson, Joan, Economic Philosophy, Ch. VI, "What Are the Rules of the Game," pp.124-147.

b. Bowles, Ch. 6, "Utopian Capitalism." and Ch. 14, "Economic Governance." (see Study Notes)

c. Schmid, C&C, Section 5.5, "Social Choice," and 12.5, "End of the God Trick."

d. Singer, Joseph, "Legal Realism Now," California Law Review, 76(2):465-544 (1988). Optional) (Excerpt in course pack). Full text available from Hein Online.


IV. CAN WE PREDICT THE CONSEQUENCES (PERFORMANCE) OF ALTERNATIVE INSTITUTIONS?

  22. Experimental Economics ------------------------------------------------------------------Nov. 13 Powerpoint

a. Schmid, C&C, Ch. 7, 7.1, "Introduction" and 7.2, "Experiments"

b. Ledyard, J. "Public Goods: A Survey of Experimental Research," in J. Kagel & A. Roth, Handbook of Experimental Economics, Ch. 2, (1995).

23. Case Studies ----------------------------------------------------------------------------------Nov. 15 --------Term Paper outline due.

Schmid, 7.3. "Case Studies" and one of the following:

a. Ostrom, Elinor, Larry Schroeder and Susan Wynne. Institutional Incentives and Sustainable Development, (1993) pp. 35-6, 43-4, 56-57, 68-70, 87-88; & 177-181, 209-10, and pp. 225-29.

b. Fukuyama, F. Trust, Part II: Low Trust Societies & the Paradox of Family Values, Ch. 8 (China). (1995).

c. Greif, Avner. "Institutions and Commitment in International Trade: Lessons from the Commercial Revolution," American Economic Rev. 82:(2)128-133 (1992). (Available from JSTOR)

24. Econometric Studies -------------------------------------------------------------------------Nov. 20 (Note assignment) Powerpoint

a. Schmid, 7.4. "Econometrics"

b. Rodrik, Dani, "Institutions Rule: The Primacy of Institutions over Geography & Integration in Economic Development," NBER Working Paper 9305, 2002.

25. Market Institutions: Law and Economics ------------------------------------------------Nov. 22 (Note assignment) Powerpoint

Schmid, C&C, Ch. 8, "Markets" and one of the following:

a. DeSoto, Hernando, The Other Path, Ch. 5, "The Costs and Importance of the Law," esp. pp. 158-187.

b. Pencavel, John, and Ben Craig, "The Empirical Performance of Orthodox Models of the Firm: Conventional Firms and Worker Cooperatives," Journal of Political Economy, 102(3):718-44 (1994). (Available from JSTOR)

c. Olson, Mancur, "Why Some Nations are Rich, and Others Poor," J. Econ. Perspectives, 19(2):3-24 (1996). Available from JSTOR)

26. Labor Institutions ------------------------------------------------------------------------------Nov. 27 Powerpoint

a. Schmid, C&C, Ch. 11, "Labor Institutions."

b. Bowles, Ch. 8 "Employment, Unemployment and Wages," conclusion only, pp. 295-8.

c. Bergmann, Barbara, (1989) "Does the Market for Women's Labor Need Fixing?" J. of Econ. Perspectives, 3 (Winter):43-60.(Available from JSTOR)

27. Technology Institutions------------------------------------------------------------------------Nov. 29 Powerpoint

Schmid, C&C, Ch. 10, "Technology: Growth & Institutions." And one of the following:

a. Ruttan, Vernon, and Yujiro Hayami, "Toward a Theory of Induced Institutional Innovation" Journal of Development Studies, pp. 203-23 (1984).

b. Schmid, "Biotechnology, Plant Variety Protection, and Changing Property Institutions in Agriculture," North Central J. of Agr. Econ. 7:129-38 (1987).

28. Political Institutions: Constitutional Economics --------------------------------------------Dec. 4 Powerpoint

a. Schmid, C&C, Chapter 12, "Political Institutions."

b. Sandmo, A.,"Buchanan On Political Economy," J. of Econ. Literature, 28(1):50-65, March, 1990 (optional). (available from JSTOR)


V. CAN WE CREATE NEW INSTITUTIONAL ALTERNATIVES?

29. Can the Timid Get There From Here? ---------------------------------------------------Dec. 6 Powerpoint

a. Schmid, Allan, "Broadening Capital Ownership: The Credit System as a Locus of Power," in Alperovitz and Skurski, eds., American Economic Policy, (1984).

b. Schmid, C&E, Ch. 9, "Macroeconomic Institutions." (optional)

30. Final Exam Period,

Oral Presentation of Term Papers to Class. Distribute Summaries of Abstract.

Term paper due on last day of semester classes (Friday).

______________________________________________________________________________

Course Homepage - http://www.msu.edu/course/aec/810/810.htm

Institutional & Behavioral Economics Homepage-- http://msu.edu/user/schmid/instecon.htm

If you have any questions or comments, please email schweikh@msu.edu

phone (517) 355-2320