INSTITUTIONAL ECONOMICS THEORY AEC 810, Schmid

Variables and Relationships (Impact Analysis unless otherwise noted)

SITUATION STRUCTURE (POLICY) PERFORMANCE Variables
Incompatible Use Good (IUG) 1.Factor ownership by person A or person B. Use or exchange rights

2. Degree of competition if mkt.

1. Who creates externalities for whom.

2. P = MC. No one affects price.

High Exclusion Cost (HEC) 1.Markets

A. Tie-in sales allowed.

2. Administration (tax)

3. Status

1. Free riders frustrate would-be riders. Reduced if tie-on sales allowed.

2. Reduced free riders, but some object. Unwilling riders.

3. Neither of the above.

Interdependent binary choices.

"Mixing and sorting"

1. Markets--isolated individual choice at the margin.

2. Collective choice--

Administrative rule.

3. Status

1. Aggregate result (mixtures) preferred by most is not achieved. Tragedy.

2. Achieved, but some may feel forced.

3. Achieved, individuals regard process as natural.

Prisoner's Dilemma (PD)

Existence of a dominant choice

1. Market

a. (If repeated, play tit-for-tat)

2. Collective; discussion.

3. Status

1. Defection. Result no one wants.

a. Trap avoided.

2. Cooperation.

3. Cooperation.

Increasing returns

Economies of Scale






 




Super-ordinary

1. Rules of demand alteration....Herd mentality.

2. Price differentiation

Predatory pricing. Anti-dumping rules in int'l trade. .....Infant industry protection.

3. Who chooses quality if only few large scale standard products.

4. Intro of new products into market or by collective action.

Monopoly (franchise bidding) or many firms.

1. Price-variety trade-off.

2. Who pays fixed or only variable cost

Instability. No equilibrium. Relative growth of nations.

3. Price-variety trade-off.

 

4. Path dependence; cumulative - causation. Lock-in.

Price-variety trade-off.

Marginal cost = Zero (MC = 0)

a. Avoidable, i.e. optional.



b. Unavoidable & Pre-emptive


1. Cost-sharing rule.



2. Cost-sharing plus who chooses the single available quality.

 

3. Regulated monopoly or many providers.


1. Who pays fixed or only variable cost?

 

2. More important than in (a.) because can't adjust quantity taken & only one quality will exist. Whose preferences count?

3. Unit cost vs. variety.

Transaction Cost:

a. High information cost (HIC) (measurement)

(monitoring)

(asymmetric)

b. Uncertainty + specific assets.

 

 

c. Uncertain future states of the world--technology and preferences

 

 

d. C-D gap

e. Radical subjectivity

These differ depending on the kind of transaction cost:
1.Labeling regulation.

Products liability.

....Penalties for failure to reveal quality.

2. Market vs. Status

3. Integration; hostages; non-standard contracts.

 

4. Advertizing.

Insurance

Subsidies to investment

5. SOP's; culture

6. Keiretsu; alliances,

Learned fads of conjecture and speculation.


1. Cost of producing info paid by different parties with different costs of obtaining information. Who makes mistakes?


2. Labor shirks or identifies with firm.

3. Value of specific assets not lost. Trade-off between flexible technology and low cost per unit of output.

4. Consumer loyalty.

Uncertainty reduced to risk.

Investment recovery.

5. Predictability of the acts of others.

6. Work together to imagine and create the future.

Change Analysis: Increasing returns to using present institutions. Cognitive capacity; Bounded rationality; HIC; PD. HEC within group of beneficiaries.

Rules of political choice affecting how organizations can change insitutions, i.e. the economic rules. e.g allow "tie-in sales" to finance lobbying. Ideology. Emotion. Institutional change in workaday economic rules, i.e. formal law
Change Analysis

IUG with respect to workaday rules among competing groups. Political externality.

Rules for making rules:

Constitutions; e.g. Magna Carta,

Money for politicians,

Congressional rules committee.

Change in workaday rules.

Security of rights. Incentive to invest. Balance of stability and change.

Creative destruction?

 

Change Analysis (Informal institutions)

Same sources of inter-dependence as above

Mental processes of learning, ideology, what seems to fit. Who comes up with the best sound bites.

Change in informal institutions, customs, etc.

 

 

 

810-SSP\ssp-chrt August 14, 2000