Plenary lecture notes of the course Institutional Economics

Lecture 1
7-11-2018

What is insttttinaa ecinimics?
Institutional ectioniomicts e(IE)i e(spictcfitall encw ecnstitutional ectioniomicts)i e= ean ecnitcgraation eiof ectioniomict eithcioaccs eiof e
irganizatins, infirmatin, priperty rights eand etransactin cists

Institutional ectioniomicts eshiows ewh eand ehiow ecnstitutions emiatca ebuit ecs enit abitt insttttins strictay

Sime qtestins mitiatng g E
 Wh edio efiamis ecxcsit?
o Fcamis, ewhaitcvca eithc edio, eadd esiomicithcngr e(cftccnt )i. eWc eitakc eithc ecxcsitcntc eiof efiamis efioa e
graanitcd.
 Wh edio ewc ehavc emian efiamis, ecnsitcad eiof eionc ebcgr efiami?
o Wc enccd ectioniomiccs eiof estalc eitio ehavc emian esmiall efiamis, ebuit ewc edion’it ekniow ewhcac ectioniomiccs e
iof estalc etiomic efaiomi.
 Whcn edio emiaakcits efacl?
o Whait etan ebc edionc eabiouit efaclcngr emiaakcits?
 Thc eionl eithcngr eI, eas ea ebu ca, ehavc eitio ekniow ecs eithc epiactc eiof ea epiaiodutit. eBuit eithcs ecs eionl e
aclcvanit ecf emiaakcits eaac enioit efaclcngr.
 Wh edio efiamis esiomictmics emicagrc ewcith eioithca efiamis ewhclc eioithca efiamis escll eiof epiaait eiof eithcca ebuscncss e
attvctcs?

Why insttttinaa ecinimics?
 Hiow epiciopilc e/ eatitioas ebchavc ecn esitandaad emiiodcl
o Utlcit emiaxcmiczation eundca etionsitaacnits
 Thacc etiomipiioncnits
1. Pacfcacntcs e& eutlcit efunttion e(U)i
2. Cionsitaacnits e(budgrcit)i e(C)i
3. (Rclatvc)i epiactcs e(P)i
 Bchavcioa eB e= eMaxUC,P

Piwerfta theiretcaa aenses…
… ebuit egraioundcd ecn ecntacdcbl esitaiongr eassumipitions, esuth eas:
 Apipiaacnitl eithcac eaac escllcas eiof ebananas eand eapipilcs eand eapipiaacnitl eI ehavc esiomicithcngr eitio eitaadc ewcith e
ithcmi ecn eioadca eitio ebu eithcsc eapipilcs eand ebananas




… ebuit egraioundcd ecn ecntacdcbl esitaiongr eassumipitions, esuth eas:
 Apipiaacnitl ea encgratvc edcmiand eshiotk e“auitiomiattall y edctacascs esupipil

,g nsttttinaa ecinimics (g Ei
 Etioniomict eatitioas eaac ecmibcddcd ecn epiaattulaa ecnstitutional ecnvcaionmicnits
 Whait edio ecnstitutions edio? eGiovcan e(ctioniomict)i ecxthangrc
o Etioniomict eitaansattions: eAlbcait eHccjn
 Nion-ctioniomict eitaansattions: eDiowa , ebacdc epiactc
 Wh edio ewc enccd egriovcanantc eiof ectioniomict ecxthangrc?
o Exthangrc ecs enioit ecas eioa efacttionlcss
 eTransactin cists (TCsi. eWc enccd eithcs egriovcanantc eiof ectioniomict ecxthangrc ebctausc e
cxthangrc ecs enioit ecas eioa efacttionlcss.

What are insttttins?
 “Rulcs eiof eithc egramicy e(Diougrlass eNioaith)i
 Siotcal esitautituacs ecnablcngr emicancngrful esiotcal ecnitcaattion
o Nioitabl eecinimic exchange
 Rcdutc eitaansattion etiosits e(TCs)i
 Atit eas ecntcntvc esitautituac eiof ea esiotccit
o Whait eit pic eiof ebchavcioa ecs e“piaiofiitablcy?

What is g E abitt?
 Siomic eithcmics e& etiontcpiits ecn eIE
o Opipiioaituncstt ebchavcioa: esiomicionc ecs eitakcngr eadvanitagrc eiof e iou eioa evctc evcasa.
o Bioundcd eaationalcit evs. eh picaaationalcit
o Rcsk eand euntcaitacnit
o As mimicitact ecnfioamiation
o Maakcit efacluac e/ e(ncgratvc/piiosctvc)i ecxitcanalctcs
o Initcanalczation evs. eaami’s elcngrith eitaadc
 Fcamis evs. emiaakcits

Transactins as key tnit if anaaysis
 Taansattions emiatca!
o Exchange  speciaaizatin  weafare
 Dcvcscion eiof elabioa e/ eAdami eSmicith’s epicn efatitioa
 If eithcac ecs eitaadc, e iou edion’it enccd eauitaak
 Undca ewhait etcatumisitantcs edio etcaitacn eitaansattions etiomic eabiouit?
o Siomic egrioiods ecascl eitaansatitcd
 Ocl, etioan
o Siomic egrioiods encvca eitaansatitcd
 Oagrans
o Siomic egrioiods encvca epiaiodutcd
 Publct egrioiods

Sttdy if transactin cists (TCsi
= eithc etiosit eithait eiottua ebcfioac ea eitaansattion eitakcs epilatc. eThese are ni trading cists!!!
 TCs↑ e e# eitaansattions↓
o Wclfaac↓
 TCs eas edcpicndcnit evaacablc e(DV)i
o Wh e/ ewhcn eTCs eaac ehcgrh eioa eliow
 Hcgrh: etiomipilcx epiaiodutits
 Liow: escmipilc epiaiodutits
 TCs eas ecndcpicndcnit evaacablc e(IV)i
o Hiow eTCs eaffctit evaacious efioamis eiof e(ctioniomict)i ebchavcioa eand eiouittiomics
 Indcvcduals, efiamis e& esiotcctcs eas ea ewhiolc
 Cimparatie perspectie

,Mire in TCs as independent iariabae
 Lcvcl ecffctits evs. epiaiobabclcit ecffctits
o Mataio efiotus evs. emictaio efiotus
 Mataio ecmipilctations eiof eTCs
o E.gr., elcvcls eiof ectioniomict epicafioamiantc eiof etiounitaccs
 Mctaio ecmipilctations eiof eTCs
o TCs eaffctit ethioscn emiiodcs eiof egriovcanantc eiof ecxthangrc
 E.gr., egriovcanantc emiiodc eX emire/aess aikeay ewhcn eTCs eaac ehcgrh
 Giovcanantc emiiodc eY emire/aess aikeay ewhcn eTCs eaac eliow
 Liogrctal equcstion: eHiow enaituac eiof eitaansattions eaffctits eTCs?
 Hiow enaituac eiof eitaansattions eaffctits eaikeaihiid eiof eadiopition eiof epiaattulaa e
griovcanantc emiiodcs

Neicaassicaa ecinimics (NEi
 Atitioas eaac eh picaaational: epiciopilc eaac enioit efull eaational.
 Maakcits ealwa s ecxcsit e& encvca efacl
o Paacitio eiopitmial
 Pactcs eacfctit eionl eaclcvanit ecnfioamiation
o Idcntit eiof ebu ca e/ escllca ecmimiaitcacal
o Nio eitaansattion etiosits
 IE eadds eacalcsmi
o IE etan ecvcn eexplain eabscntc eiof eacal-wioald epihcniomicna
 Maakcits ecn e/ ecxcsitcntc eiof etcaitacn egrioiods
 Deiiatins frim NE asstmptins haie iitaa weafare impaicatins

Exampaes were NE faias and g E is needed
 Wh eaac esiomic etiounitaccs epiioioa eand eioithca etiounitaccs eacth
o Standard macro: eInvcsitmicnits e etapicital eand ekniowlcdgrc eattumiulation e epiaioduttvcit e e
graiowith eand edcvcliopimicnit
o Buit… ewh edio esiomic etiounitaccs esavc e& ecnvcsit esio emiuth emiioac eithan eioithca etiounitaccs? e
 Siomic efiamis epicafioami ebctca eithan eioithcas
o Standard micro: eNio ectioniomict epiaiofiits, eunlcss emiioniopiiol epiiowca
o Buit… ecvcn efiamis ewcith ecxatit esamic epiaioduttion eitcthnioliogr eand eacsiouatcs ehavc evasitl edcffcacnit e
lcvcls eiof epiaioduttvcit

Stmmary if tiday
 Etioniomicts ecs eabiouit eithc eiopitmial ealliotation eiof estaatc eacsiouatcs egrcvcn eithcsc eacsiouatcs’ ealitcanatvc euscs
 Opitmial ealliotation eacqucacs ecxthangrc
 Exthangrc ecs enioit efacttionlcss
 Faiomi epiacfcacntcs, etionsitaacnits eand epiactcs eitio eatitual eacal-wioald ecxthangrc
o Wh ?
 Bctausc eX
 Wh ex?
o Bctausc eY?
 Wh eY?

NE ecs eithc eadulit, eIE ecs eithc ethcld.

, Lecture 2
8-11-2018

1. Recap if L1
 Paiofitngr efaiomi espictcalczation eacqucacs ecxthangrc
o In eacal elcfc, ecxthangrc ecs enioit eatituall ebccngr eacalczcd.
o Whcncvca eitaansattion etiosits eaac ehcgrhca eithan e0, eithcac ecs esiomicithcngr epiacvcntngr ecxthangrc efaiomi e
hapipicncngr.
 Nciotlassctal ectioniomicts e(NE)i
o Exthangrc ealwa s ehapipicns eand ecs efacttionlcss
 Institutional ectioniomicts e(IE)i
o Taansattions enccd eitio ebc esitudccd
 IE eadds eacalcsmi
o Deiiatins frim NE asstmptins haie iitaa weafare impaicatins

Cionitaatits ewcll espictcf ewhait ecs ebccngr ecxthangrcd.

Preambae: g nterreaated cincepts




2. Priperty rights theiry (PRTi
 Classct epiaiopicait eacgrhits eithcioa
 Miodcan epiaiopicait eacgrhits eithcioa
o Vca etliosc eassiotcaitcd ewcith etionitaatits

Classct edcfinction eiof epiaiopicait eacgrhits e(PRs)i: e“The right of individuals to use resources… supported by the force of
etiquete, social custom, ostracism, and formal legal rules enacted by the statesl poeer of violence or
punishmenty e(Althcan e1965)i
 I eiown esiomicithcngr, eand eithcs emicans eithait eI etan eusc ecit

Caassic PRT: Btndae if rights
1. Rcgrhit eitio etse egrioiod
2. Rcgrhit eitio eearn incime efaiomi egrioiod
 Fioa ecxamipilc, elcndcngr eiouit e ioua egrioiod
3. Rcgrhit eitio etransfer grioiod eitio eioithcas
 Yiou etan escll ecit eitio esiomicionc eclsc

Onl ecf eall eithacc eaac esatsficd, e iou eaac eithc eiownca eiof eithc epiaiodutit.

Examipilc:
Whio eiowns ea ehumian ebiod ? eSiomic etiounitaccs ehavc elcmicitations eion eiowncngr emiionc ewcith ea ehumian ebiod .

Evcn eithiougrh e iou eiown e ioua ebiod , ecit etiould ebc epiiosscblc eithait ecit ecs enioit ealliowcd eitio escll e(piaaits eiof)i e ioua ebiod eioa emiakcngr
miionc ewcith e ioua eiown ebiod .
 Paiostitution