Agrarian Institutions Analysis Session 13

1
Agrarian Institutions AnalysisSession 13

• Dr. Michael Sykuta
• University of Missouri-Columbia
• Department of Agricultural Economics
• Director, Contracting and Organizations Research
  Institute
• 135 Mumford Hall, Columbia, MO 65211-6200 USA
• Phone [phone], Fax [phone]
• www.cori.missouri.edu
• sykutam_at_missouri.edu

2
Review of Basic Concepts

• What is New Institutional Economics?
• Simply relaxes certain neoclassical assumptions
• Transaction costs are positive
• Information is not perfect
• Decision makers are boundedly rational
• Institutions Matter
• It is necessary to understand the rules of the
  game by which individuals trade in order to
  understand how they choose to trade.

3
Review of Basic Concepts

• What are transaction costs?
• The costs of engaging in an exchange transaction
• Search costs
• Negotiation costs
• Contracting costs
• Monitoring costs
• Enforcement costs
• Note, most all have to do with information costs
  of some sort.

4
Review of Basic Concepts

• What is a transaction?
• A (voluntary) reallocation of property rights.
• Remember transactions are not about exchanging
  goods and services per se, but about exchanging
  property rights to the valuable attributes
  embodied in those items.
• You need to identify the attributes that are the
  source of value!

5
Review of Basic Concepts

• What are property rights?
• The right to
• Use the asset (usus)
• Appropriate returns/benefits from the asset (usus
  fructus)
• Change its form, substance, location (abusus)
• A single asset may have multiple dimensions of
  property rights
• Property rights may be partitioned and exchanged
  in part, or in whole.

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Review of Basic Concepts

• Private property rights
• Include ability to exclude others from using
  asset
• May be attenuated by institutional constraints
• For property rights to have value
• Must be well-defined
• Must be enforced

7
Review of Basic Concepts

• Adam Smith Specialization of labor is an
  essential element for individual and social
  wealth creation.
• Specialization necessitates exchange.
• Exchange requires clearly defined and enforceable
  property rights.
• Exchange also requires sufficiently low costs of
  exchange (transaction costs).

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Review of Basic Concepts

• Law of Demand tells usWhen price of exchange
  falls, the amount of exchange consumed
  increases.
• Therefore, we want to identify ways to reduce
  transaction costs to increase ability to
  specialize and to increase welfare.

9
Review of Basic Concepts

• What are Institutions?
• The formal and informal rules of behavior that
  govern interpersonal relationships
• Formal or explicit institutions are laws,
  regulations, etc.
• Informal rules are those social norms,
  traditions, and cultural rules

10
Review of Basic Concepts

• Institutions
• Define property rights
• Define rules of exchange
• Define incentives and constraints for individual
  decision makers
• Conclusion Institutions affect transaction
  costs.

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Review of Basic Concepts

• Institutional and organizational analysis is
  necessarily comparative
• We must compare feasible alternatives to
  determine the optimal solution.
• We first assume that observed differences in
  organization/governance reflect differences in
  institutional environments.

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The Problem of Social CostRonald Coase, 1960

• Three Primary Contributions
• Reconsidering the nature of externalities
• Stiglers Coase Theorem
• Coases Coase Theorem

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The Problem of Social CostRonald Coase, 1960

• Reconsidering the nature of externalities
• The concept of reciprocal harmAn externality
  cannot be created by one party aloneit takes two
  for a harm to exist.
• If it takes two to create a harm, policies that
  assign liability to only one party may be
  economically inefficient.

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The Problem of Social CostRonald Coase, 1960

• Four possible solutions to externality
  problems
• Market transactions
• Integration (incorporate within the firm)
• Government intervention
• Do nothing.
• Which creates the highest NET benefit?

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The Problem of Social CostRonald Coase, 1960

• Stiglers Coase Theorem
• When transaction costs are zero, the initial
  property right allocation is irrelevant,Or
  phrased another way
• When transaction costs are zero, an efficient
  allocation will result regardless of the initial
  allocation.

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The Problem of Social CostRonald Coase, 1960

• Coases Coase Theorem
• Because transaction costs are not zero, the
  initial allocation of property rights does
  matter
• Some welfare enhancing transactions may not occur
  because the cost is too high
• We need to pay attention to property right
  allocations and to lower transaction costs.