Posts filed under ‘New Institutional Economics’
| Peter Klein |
The ISNIE 2014 Call for Papers is now available. The conference is at Duke University, 19-21 June 2014, home of President-Elect and Program Committee Chair John de Figueiredo. Bob Gibbons and Timur Kuran are keynote speakers. ISNIE is one of our favorite conferences, so please consider submitting a proposal! Submissions are due 30 January 2014.
| Peter Klein |
Here is a symposium on Doug Allen’s very important book The Institutional Revolution (Chicago, 2011). The symposium features essays by Deirdre McCloskey, Joel Mokyr and José-Antonio Espín-Sánchez, and our own Dick Langlois, along with a reply by Doug. The issue revolves around the role of measurement, and Doug’s thesis that reductions in measurement costs are central to improved economic performance.
My favorite line, from Doug’s reply:
I have read “The Problem of Social Cost” more times than I can recall, and study as I may, I have never found a logical error in it. But here is the point: if the author, both at the time and 30 years later, still failed to fully grasp his own perfect work, then it is an understatement to note that the ideas are subtle.
| Dick Langlois |
I have recently become involved with a new organization that many readers may be interested in. It’s called the World Interdisciplinary Network for Institutional Research (WINIR). From the website:
WINIR is a specialist but global network. It is set up to complement rather than rival other organisations that have the study of institutions on their agenda. Unconfined to any single academic discipline, it accepts contributions from any approach that can help us understand the nature and role of institutions. While other organisations are intended to act as broad forums for all kinds of research in the social sciences, WINIR aims to build an adaptable and interdisciplinary theoretical consensus concerning core issues, which can be a basis for cumulative learning and scientific progress in the exciting and rapidly-expanding area of institutional research.
You can learn more and sign up here. If you join now, you will be considered a founding member. WINIR is tentatively planning a conference for next year near London and one the year after that in Rio.
| Peter Klein |
From Jill Bradbury:
The herd strays; crops die.
Who pays? Gain and harm are weighed.
Not Pigou’s frayed nerves.
Feel free to try your hand in the comments.
| Peter Klein |
Ronald Coase passed away today at the age of 102. One of the most influential economists of the 20th century, perhaps of all time. His “Problem of Social Cost” (1960) has 21,692 Google Scholar cites, and “The Nature of the Firm” has 24,501. Adam Smith’s Wealth of Nations, summed across editions, has about 30,000. Coase changed the way economists think about the business firm and the way they think about property rights and liability. He largely introduced the concepts of transaction costs, comparative institutional analysis, and government failure. Not all economist have agreed with his arguments and conceptual frameworks, but they radically changed the terms of debate in the economics of law, welfare, industry, and more. He is the key figure in the “new institutional economics” (and co-founder, and first president, of the International Society for New Institutional Economics).
Coase did all these things despite — or because of? — not holding a PhD in economics, not doing any math or statistics, and not, for much of his career, working in an economics department.
We’ve written so much on Coase already, on these pages and in our published work, that it’s hard to know what else to say in a blog post. Perhaps we should just invite you to browse old O&M posts mentioning Coase (including this one, posted last week).
The blogosphere will be filled in the coming days with analyses, reminiscences, and tributes. You can find your favorites easily enough (try searching Twitter, for example). I’ll just share two of my favorite memories. The first comes from the inaugural meeting of the International Society for New Institutional Economics in 1997. After a discussion about the best empirical strategy for that emerging discipline. Harold Demsetz stood up and said “Please, no more papers about Fisher Body and GM!” Coase, who was then at the podium, surprised the crowd by replying, “I’m sorry, Harold, that is exactly the subject of my next paper!” (That turned out to be his 2005 JEMS paper, described here.) A few years later, I helped entertain Coase during his visit to the University of Missouri for the CORI Distinguished Lecture. At lunch we talked about his disagreement with Ben Klein on asset specificity. After the lunch he got up, shook my hand, and announced, with evident satisfaction: “I see all Kleins are not alike.”
| Peter Klein |
Economists and management scholars know Stuart Macaulay’s landmark 1963 article, “Non-Contractual Relations in Business: A Preliminary Study,” as the foundation for modern work in relational contracting. As Williamson (1985, p. 10) put it, “Macaulay’s studies of contractual practices support the view that contractual disputes and ambiguities are more often settled by private ordering than by appeal to the courts — which is in sharp contrast with the neoclassical presumptions of both law and economics.” A new book on Macaulay has promoted a symposium over at the ContractsProf Blog. I’m particularly looking forward to this week’s contributions, especially the one from Gillian Hadfield.
| Peter Klein |
ISNIE is holding its annual conference next week in Florence. I hope to see many O&Mers there. Eric Maskin and Samuel Bowles are keynoting, and there are special tracks or sessions to honor Elinor Ostrom (who passed away last year) and Oliver Williamson (who recently turned 80).
| Dick Langlois |
In September I will be part of a symposium on “Institutions and Economic Change,” organized by Geoff Hodgson’s Group for Research in Organisational Evolution. The workshop will be held on 20-21 September 2013 at Hitchin Priory, Hitchin, Hertfordshire, England. Here is the program and call for participation:
Masahiko Aoki (Stanford University, USA)
“Between the Economy and the Polity: Causation or Correlation. Theory and a Historical Case from China”
Francesca Gagliardi (University of Hertfordshire, UK)
“A Bibliometric Analysis of the Literature on Institutional Complementarities”
Geoffrey Hodgson (University of Hertfordshire, UK)
“A Manifesto for Legal Institutionalism”
Jack Knight (Duke University, USA)
“Courts and Institutional Change”
Suzanne Konzelmann (Birkbeck College, University of London, UK)
“‘Picking winners’ in a Liberal Market Economy: Modern Day Heresy – or Essential Strategy for Competitive Success?”
Richard Langlois (University of Connecticut, USA)
“The Institutional Revolution: A Review Essay”
Ugo Pagano (University of Siena, Italy)
“Synergy, Conflict and Institutional Complementarities”
Abstracts are available on this GROE webpage: uhbs-groe.org/workshops.htm
This workshop is designed to provide in-depth discussion of cutting-edge issues, in a forum that permits the attention to detail and definition that is often lacking in larger, conference-style events. The expected maximum number of participants is 50. Our past Workshops have filled up rapidly, so please book early to avoid disappointment. The workshop will include a poster session where participants may present their research, as long as it is related to the workshop theme. To apply to be included in the poster session send an abstract of your paper to Francesca Gagliardi (firstname.lastname@example.org). To reserve a place on the workshop please visit store.herts.ac.uk/groeworkshop
| Peter Klein |
| Peter Klein |
The Center for Institutional Studies at Russia’s Higher School of Economics sponsors an annual summer school “aimed at creating and supporting the academic network of young researchers from all regions of Russia as well as from CIS and other countries, who work in the field of New Institutional Economics.” This year’s conference is 29 June – 5 July in Moscow, and the faculty includes former O&M guest blogger Scott Masten along with John Nye, Russell Pittman, Garrett Jones, and many others. The full program, along with registration and other info, is available at the conference site.
| Benito Arruñada |
Underprovision of Public Registries?
Organizing registries is harder than it seems. Governments struggled for almost ten centuries to organize reliable registries that could make enabling rules safely applicable to real property. Similarly, company registries were adopted by most governments only in the nineteenth century, after the Industrial Revolution. Moreover, though most countries have now been running property and company registries for more than a century, only a few have succeeded in making them fully functional: in most countries, adding a mortgage guarantee to a loan does not significantly reduce its interest rate.
US registries show that these difficulties do not only affect developing countries. Many US registries are stunted, shaky institutions whose functions are partly provided by private palliatives. In land, the public county record offices have been unable to keep up with market demands for speed and uniform legal assurance. Palliative solutions such as title insurance duplicate costs only to provide incomplete in personam guarantees or even multiply costs, as Mortgage Electronic Registry Systems (MERS) did by being unable to safely and comprehensively record mortgage loan assignments. In company registries, their lack of ownership information means that they are of little help in fighting fraud, and their sparse legal review implies that US transactions require more extensive legal opinions. In patents, a speed-oriented US Patent and Trademark Office combines with a strongly motivated patent bar to cause an upsurge of litigation of arguably dangerous consequences for innovation.
The introduction of registries has often been protracted because part of the benefits of registering accrue to others. They also have to compete with private producers of palliative services (i.e., documentary formalization by lawyers and notaries) who usually prefer weak or dysfunctional registries, as they increase the demand for their services. Moreover, most legal resources, including the human capital of judges, scholars, and practitioners is adapted to personal instead of impersonal and registry-mediated exchange.
Information and communication technologies have opened new possibilities for impersonal trade, thus increasing the demand for the institutions, such as registries, that support impersonal trade. Economic development therefore hinges, more than ever, on governments’ ability to overcome these difficulties, which are allegedly holding back the effective registries needed to enable impersonal exchange and exhaust trade opportunities.
Arrunada Seminar: Corrado Malberti – What could be the next steps in the elaboration of a general theory of public registers?
| Corrado Malberti |
What could be the next steps in the elaboration of a general theory of public registers?
From a lawyer’s perspective, one of the most important contributions of Arruñada’s Institutional Foundations of Impersonal Exchange is the creation of a general economic theory on public registers. Even if this work is principally focused on business registers and on registers concerning immovable property, many of the results professor Arruñada achieves could be easily extended to other registers already existing in many legal systems or at the transnational level.
For example, a first extension of the theories proposed by professor Arruñada could be made by examining the functioning of the registers that collect information on the status and capacity of persons. A second field that should probably benefit from professor Arruñada’s achievements is that of public registers that operate at a transnational level and established by international treaties. In particular, in this second case, the reference is obviously to the Cape Town convention on International Interests in Mobile Equipment which will, and — to some extent — already has, resulted in the creation of different registers for the registrations of security interests for Aircrafts, Railway Rolling Stock, and Space Assets. In my view it will be important to test in what measure the solutions adopted for these registers are consistent with the results of Arruñada’s analysis.
Corrado Malberti, Professor in Commercial Law. University of Luxembourg. Commissione Studi Consiglio Nazionale del Notariato.
| Matteo Rizzolli |
Will ICT Make Registries Irrelevant?
With this brief post, I would like to add some further discussion on the role of new technologies and ICTs for the evolution of registries. The book of Prof Arrunada touches upon the issue in chapter 7 where the role of technical chance is tackled. He discusses mainly the challenges in implementing different degrees of automation in pre-compiling and lodging information from interested parties and even in automating decision-making by the registry itself.
These challenges represent the costs of introducing ICTs in registries. In the book the benefits of ICTs for abating the costs of titling/recording are not discussed at length. Think of them in terms of the costs of gathering, entering, storing, organising and searching the data. I assume it is trivial to say that ICTs decrease the fixed and variable costs of registries even when some issues raised in the book are considered. In terms of the figure below (my elaboration of figure 5.1 on pg 133) this is equivalent to say that, thanks to ICTs, the black line representing the “Value of land under public titling” shifts upwards and therefore the “Indifference point for individual titling decisions” shifts leftward and makes registries more desirable.
However, i think that an important effect of ICTs is neglected in this analysis. In fact ICTs are now pervasive in most transactions. Land is observed with all sorts of satellite technology and the movement of objects and people is traced in many ways. Communications, both formal and informal are also traced and information on companies is just one click away for most individuals. I don’t want to discuss philosophical, sociological or legal aspects of this information bonanza. Neither neglect that more information doesn’t mean better or more trustworthy information. On the other I think we can agree that the quantity of information available to counterparts of a transaction is greatly increased and -more important- that verifiable evidence can be produced more easily should legal intervention in case of conflict arise.
All this information windfall may -this is my hypothesis- decrease the costs of keeping transactions out of registries and therefore improve the value of transactions under privacy. In terms of the figure below, this amounts to rotating the red line upwards and, as a result, shifting the “Indifference point for individual titling decisions” on the right.
In a sense, ICTs both i) decrease the costs of registries and ii) makes registries less relevant. On balance, it is hard for me to say which effect of ICTs may prevail. I think however this could be a very interesting empirical question to research.
Matteo Rizzolli. Assistant Professor of Law and Economics at the Free University of Bozen, Italy. Board member and secretary of the European Law & Economics Association
Click figure for higher resulution:
Arrunada Seminar: Rod Thomas – Developing a Credible Automated System for Agency Registration under a “Registration of Rights” Model
| Rod Thomas |
Developing a Credible Automated System for Agency Registration under a “Registration of Rights” Model
In his book, Arruñada rehearses the debate between mere recordation of deeds versus registration of rights. Under the “registration of rights” model, the registration event may be backed by a State guarantee of ownership, as is the case under a Torrens system. Under such a system, the need for a credible automated system is paramount. This is because the registration event is normally conclusive as to title rights, even in the face of third party ineptness or fraud in undertaking the registration. By way of example, in Torrens systems, the transaction, once completed, can conventionally only be overturned where the transferee is found to have been fraudulent in obtaining the registered title interest even if the dealing is void at law.
Under a registration of rights model there is a heightened sense of vulnerability where the registration even is undertaken by an agent. This is because the agent and not the transferee may have been either fraudulent or inept in undertaking the transaction. An example of such a system in operation is the Landonline System, as it presently exists in New Zealand, where only agency registration is possible.
Arruñada also argues that for a registration system to be successful, it needs to be both cost effective and accessible. Consequently a tension arises under a registration of rights model, operated by agency registration. On the one hand effective measures need to be put in place to protect consumers from inept or fraudulent transactions. On the other hand, a system which is overly complex, or expensive to operate, is unlikely to be successful.
Such concerns may be less pressing in countries where digitalised signatures already play a key role in authorising transactions. In those jurisdictions it appears to be a relatively straightforward procedure to incorporate the need for the existing interest holder’s digitalised signature before a transaction can occur. What however of jurisdictions such as the United Kingdom, Australia or New Zealand where digitalised signatures are not in ready use and agency registration is common?
Various possibilities come to mind for these other jurisdictions. One may be imposing a system where each dealing must first be authorised by a private PIN number known only to the existing land interest holder. This however may be cumbersome to operate and regulate. Also, PIN number may not be securely kept, so abuses could still occur. Another possibility may be to incorporate “flags” into the automated system, so the interest holder is notified of any proposed dealing with his or her interest, and can therefore block the proposed registration before it occurs.
The question therefore needs to be asked; “what possibilities exist under a registration of rights model (in the absence of electronic signatures) for setting up a safe and cost effective automated system, operated by agency registration?”
Rod Thomas. Senior Lecturer in Law, Auckland University of Technology, New Zealand
| Peter Klein |
Organizational economics involves the use of economic logic and methods to understand the existence, nature, design, and performance of organizations, especially managed ones. As this handbook documents, economists working on organizational issues have now generated a large volume of exciting research, both theoretical and empirical. However, organizational economics is not yet a fully recognized field in economics — for example, it has no Journal of Economic Literature classification number, and few doctoral programs offer courses in it. The intent of this handbook is to make the existing research in organizational economics more accessible to economists and thereby to promote further research and teaching in the field.
This is a fair assessment, though some O&M readers may find the editors’ definition of the field too narrow. The volume covers a wide variety of issues, topics, and applications but nearly all from the perspective of modern neoclassical economics (there’s a chapter on TCE by Williamson and Steve Tadelis, but nothing on “old” property rights theory, capabilities, the knowledge-based view, etc.). Still, it appears to be an excellent collection of state-of-the-art papers. Besides the usual topics like incentives, authority, complementarity, innovation, ownership, vertical integration, and the like, there’s also an interesting methodological section featuring “Clinical Papers in Organizational Economics” by George Baker and Ricard Gil, “Experimental Organizational Economics” by Colin Camerer and RobertoWeber, and “Insider Econometrics by Casey Ichniowski and Kathy Shaw. Check it out.
| Stephen Hansen |
Public Institutions and Endogenous Information in Contracting
Benito Arruñada’s Institutional Foundations of Impersonal Exchange: Theory and Policy of Contractual Registries is an impressive and erudite study of the relationship between legal institutions and impersonal exchange. While clearly valuable for better understanding policies regarding formalization, in my mind it also introduces ideas that are relevant for contract theory more generally and yet hardly treated in the literature.
Since the 1970′s economic theorists have understood that information asymmetries between parties who write contracts are a key source of inefficiencies in exchange. Since then, a vast literature has developed exploring this idea from many different angles. Nevertheless, two key features usually appear. First, the set of parties who write contracts all observe each other, know they are contracting with each other, and (with some exceptions) observe the terms of the contracts agreed. Second, the information asymmetries are assumed to be a fixed, exogenous feature of relationships.
Benito’s book convincingly shows that both of these limit our understanding of trading frictions in the real world. A key insight is that, in addition to his “type” or “action” (to use the language of contract theory), the formal contracts that an economic agent has written with others may be unobservable. After reading the book, it became clear to me that this dimension of non-observability is just as important for generating market failure as others. The second, and intimately related, insight is that the degree of non-observability of contractual rights depends on public institutions, in particular registration systems. Whereas it is unclear how a public body would help contracting parties discover — to take a standard example — each other’s preferences over the good they are proposing to trade, Benito shows that they can affect the amount of information they have about each other’s formal legal rights. And, in line with what one would expect, when institutions can reduce this information asymmetry, the likelihood of efficient trades increases.
Putting these two ideas together provides an original and to me very exciting view on the value of legal systems. Economists often discuss “good” legal systems as those which enforce written agreements transparently at low cost. After reading Benito’s book, I recognized that legal systems also act to endogenously affect the amount of information that parties have available to reach those agreements in the first place. This deserves to be an influential idea in future discussions of law, economics, and contract theory.
Stephen Hansen. Assistant Professor. Economics Department. Universitat Pompeu Fabra. Barcelona, Spain
Arrunada Seminar: Corrado Malberti (2) – An Empirical Test on the Differences between Recordation and Registration
| Corrado Malberti |
An Empirical Test on the Differences between Recordation and Registration
One key point of professor Arruñada is that “[i]t is safe to assume that recordation is less effective than registration in avoiding title uncertainty”. However, the Author acknowledges that it would be essential to perform some empirical analysis to support his conclusions. Importantly he also acknowledges that comparing the performance of titling systems is a daunting task, and that it should be important to consider the specifics of each country.
To start the debate on this point, professor Arruñada compares simple averages for two samples of European Union countries with different titling systems. The Author discovers that, apparently (at least in Europe), registration systems are not only more effective, but also less costly than recordation systems. However, Arruñada also acknowledges that this data is more a starting point for a fruitful discussion than the end of the debate, since it would be ”premature . . . to interpret these empirical differences as causal effects, given the small samples involved”.
I completely agree with this perspective and, I also believe that, starting from this data, it will be important to further investigate the matter.
However, this also poses the question on which is the direction empirical research should take in future. In fact, it is conventional wisdom among legal scholars that registration is superior to recordation. For example, it was also for that reason that, after the end of WWI, Italy decided to preserve in the new provinces the registration system already in place in Austria-Hungary, and that France decided to maintain the livre foncier in Alsace-Moselle.
Since any generalization concerning the classifications of public registers may have little predictive value on how real legal problems are solved, probably, in future, it will be prudent to carry out empirical analyses that consider homogeneous legal frameworks. This would limit the risks of giving the same label to systems that practically adjudicate disputes in completely different ways. Thus, from this perspective, it would probably be more interesting and valuable to focus the attention on those legal systems, like the French and the Italian, where two different public registers coexist.
Corrado Malberti, Professor in Commercial Law. University of Luxembourg. Commissione Studi Consiglio Nazionale del Notariato.
| Corrado Malberti |
The Different Dimensions of Recordation and Registration
Concerning the characteristics of registration and recordation, I think that the classification made by professor Arruñada should adopt a more nuanced perspective. In fact, the distinction between, on the one hand, recordation systems where deeds are deposited to facilitate their inspection and that rely on what professor Arruñada calls a property rule, and, on the other hand, registration systems that define rights and that give preference to what professor Arruñada calls a property rule, is probably sacrificing important complexities that exist in the public registers falling in each of these two categories.
In fact, legal scholarship highlighted that the dimensions that should be taken into account in classifying public registers are, at least, three:
- the first dimension concerns what is entered in the register, either a deed or a right;
- a second dimension is related to the effects of the entry in the register, either the entry simply regulates the conflicts between two or more acquirers from the same owner, or the entry defines the right;
- finally, the third dimension concerns the role played by bad faith in making a valid entry in the public register.
The combination of these different dimensions makes the dichotomy between registration and recordation more intricate. And it has been argued that, from a legal perspective, it would be impossible to give to these categories anything more than a didactic relevance. In addition, it should also be noted that, even when classified along these three dimensions, in certain cases public registers adopt peculiar principles (e.g. the sometimes radically different rules governing adverse possession could be taken as evidence of how peculiar the practical results of each legal system could be).
Professor Arruñada makes important efforts in trying to include many of these nuances in his analysis. Yet, for many public registers it is difficult to deny the existing contaminations between recordation and registration.
Corrado Malberti, Professor in Commercial Law. University of Luxembourg. Commissione Studi Consiglio Nazionale del Notariato
| Pamela O’Connor |
Conflating Contractual and Property Rights
Coming from a property law perspective, I welcome Arruñada’s recognition of the need for economists to acknowledge the nature of property as as rights in rem (rights in things, enforceable against third parties) and their essential difference from contractual rights that bind only the contracting parties. Although legal scholars such as Bernard Rudden, Thomas Merrill and Henry E Smith have been pointing out the inadequacies of traditional economic conceptions of property for some time, economic theorists have been slow to grapple with the implications.
One consequence of conflating contractual and property rights is apparent in recent Australian legislation on resource rights. State legislatures have introduced new types of rights that run with land and bind third parties as rights in rem, but are largely defined by individual agreements. Their relationship to other property rights remains unclear, and their variability makes them costly for other people to assess. Although uptake of the new rights has been slow, they have the potential to burden land titles with proliferating rights that bind all future owners and which nobody really understands.
Pamela O’Connor. Associate Professor, Faculty of Law. Monash University. Australia
| Paul Dower |
Centralized vs. Decentralized Allocation
In Benito Arruñada’s insightful new book, Institutional Foundations of Impersonal Exchange: Theory and Policy of Contractual Registries, the widespread failure of titling programs in developing countries is used as motivation for a greater appreciation of the role of contractual registries. In many developing countries, immovable assets, especially land, are initially and subsequently allocated using a centralized mechanism as opposed to a decentralized market mechanism implicitly assumed in the book.
The conflict between those holding property and those acquiring property is different under a centralized allocation mechanism. Sara Berry in Chiefs Know Their Boundaries, an interesting work on an agricultural region of Ghana, describes the political process involved in determining the complicated overlapping and competing property claims in a system where land is allocated by a centralized mechanism. Here, the relevant asset is not exactly land but community membership. This asset consists of various rights, one of which entails a kind of social insurance that functions through land allocated based on perceived need. The chief simultaneously serves as the contractual registry, performing public reallocation of rights when necessary, as well as the steward of the community members’ rights in rem, enforceable against all parties. Since need is imperfectly observable, this allocation mechanism suffers from a moral hazard problem, in which the acquiring party has private information putting the holding party at a disadvantage. In this setting, the registry is and can not be independent but it can aim to be impartial.
This example highlights the institutional specialization required for impersonal exchange, a point made well in the book, but it also points to several difficulties not apparent in the analysis. First, the judgment proof problem is more complicated. Power and social status can create a judgment proof problem that is independent or even negatively correlated with the standard one of not having enough wealth to compensate the victim of a violation of rights. The judgment proof problem can create problems for the voluntary registration of property claims. Second, the asset that is transferred or involved in transactions in a centralized system may not easily map into assets exchangeable in a decentralized system. Here, there is a parallel to the informational externality discussed in the book concerning transactions of rights in rem. The lack of institutional specialization leads to significant information costs if rights in rem are transferred. Third, since local legal orders are usually less specialized and serve multiple purposes under a centralized allocation mechanism, they may appear weaker than they actually are. On one hand, the apparent favoritism of a local may merely reflect the fact that an outsider does not have a legitimate claim to rights in rem because the local that transacted with the outsider did not possess rights in rem (even though, as shown above, rights in rem exist and can be transferred). On the other hand, due to the social insurance role of land allocation, the local property holder commonly has a superior claim to land in the abstract than what can be acquired at any moment in time by another local or an outsider. Thus, local legal orders can be in better positions to track the competing or overlapping claims than a public registry based on a state-backed legal order, even though the political process required to adjudicate competing claims under the local legal order restricts trade opportunities.
Kinross Assistant Professor of Development Economics, New Economic School (NES). Research Economist, Center for Financial and Economic Research (CEFIR).