I wrote earlier about Doug Allen’s The Institutional Revolution (Cambridge University Press, 2011). Here’s a new EH.Net review by Mark Koyama.

Institutions in Allen’s view minimize transaction costs, where transaction costs include the costs associated with opportunistic behavior. Transaction costs precluded “first-best” institutions from developing in the pre-industrial world. Instead, apparently inefficient institutions such as tax farming, the sale of offices, and the aristocratic dominance of politics persisted for centuries. Allen argues that these apparently inefficient institutions were, in fact, efficient given the existing configuration of transaction costs. This insight, which builds on the ideas of Yoram Barzel, provides a powerful hypothesis for studying institutional change. Allen places particular emphasis on the importance of measurement. In the high variance pre-modern world, measurement was costly or impossible and consequently bureaucrats, soldiers, sailors, and policemen could not be paid on the basis of observable inputs. Alternative institutions had to emerge to deter opportunism and reward effort. These institutions were often elaborate, and sometimes strange; they involved making the bureaucrats, soldiers, or tax collectors residual claimants of some sort. The story of how these institutions disappeared and were replaced by modern institutions is The Institutional Revolution.

The institutional revolution Allen proposes is linked to the industrial revolution because technological change drove institutional change by reducing measurement costs. Standardization reduced variance. This reduction in variance lessened the possibilities for opportunistic behavior and enabled institutions based around the idea of rewarding individuals for their marginal contribution to emerge.

Via Scott Masten, an important call for papers:

The Walter A. Haas School of Business at the University of California, with support from the Alfred P. Sloan Foundation, is issuing a call for original research papers to be presented at the Conference on the Law & Economics of Organization: New Challenges and Directions.  The conference will be held at the Haas School of Business in Berkeley, CA, on Friday, Nov. 30, and Saturday, Dec. 1, 2012. The purpose of the conference is to take stock of recent advances in the analysis of economic organization and institutions inspired by the work of 2009 Nobel Laureate Oliver Williamson and to examine its implications for contemporary problems of organization and regulation. Empirical research and research informed by detailed industry and institutional knowledge is especially welcome.  Conference papers will be published in a special issue of the Journal of Law, Economics, & Organization. Submissions are due March 31, 2012.  See the Call for Papers for details.

Rob King’s 2011 AAEA Presidential Address, “The Science of Design,” takes its cue from Herbert Simon.

[M]uch of what we do as economists is akin to what Simon calls natural science. We develop theories about how the economy works, and we conduct empirical studies that test these theories or estimate the parameters of key economic relationships that explain how general results derived from our theories manifest themselves in a particular context.We strive for results that explain what is or that predict what will be. . . .

Economists also design economic artifacts (e.g., markets, contracts, organizational structures, public policies) that reshape economic systems in order to better meet human needs. This work, which I will call economic design, is complementary with but differs fundamentally from economic analysis. While economic analysis is motivated by a question or a puzzle and focuses on explaining what is and predicting what will be, economic design is motivated by a problem or opportunity and focuses on what can be and ought to be or on what will yield a satisfactory outcome. . . .

While we are comfortable in recognizing “good science” in economic analysis, I believe we have devoted less attention to developing a shared understanding of “good science” in economic design.

It is certainly true that economists are increasingly involved in economic design (a trend that accelerated around WWII) though I am less sure this is a good idea. A lot of economic design — specifying “optimal” contracts, for example — might be considered the domain of entrepreneurs, not social scientists. But applied policy work is certainly of this character, so the essay may be read as a call for applied economists to pay closer attention to issues like decomposability, modularity, search, creativity, etc.  (See Dick’s work for rich discussions of these issues.)

Kudos to Rob for a thoughtful and intelligent piece. A friend calls it “perhaps the most interesting President’s Address from AAEA in the last 20 years.”

J. Vernon Henderson and Yong Suk Lee have released a fascinating study of the make-or-buy decision in the provision of disaster relief. “We distinguish four organizational structures by implementation method. . . . (1) donor-implementers who are NGO donors who do their own implementation in villages, (2) international implementers who represent different donors who choose not to do their own implementation, (3) domestic implementers hired by donors which have chosen neither to do their own implementation nor to hire an international implementer, and (4) a country level governmental organization . . . used primarily by domestic and foreign governments.” Henderson and Lee find that donor-implementers offer the highest-quality aid, and the government agency the lowest, with the contract implementers in-between. The framework is agency theory, not transaction cost economics, but there may be a role for asset specificity as well, particularly in cases where a longer-term commitment is required. In any case, this is an interesting and important application of organizational economics to an unconventional setting.

It is not yet online, but the University of Paris-Sorbonne is looking for a Full Professor in the Economics of Organization (see the ad text below). Importantly, proficiency in French is not a requirement … “upfront,” at least.

Very apropos (if I may) the Department of Strategic Management and Globalization will be hiring one assistant professor and three associate professors in ”strategic and international management” over the next few months. Proficiency in French, or Danish for that matter, is not required at all. The job ads are here. Or, contact me directly on njf.smg@cbs.dk

Economics of Organization/ Public economics

The University of Paris (Pantheon-Sorbonne) has an opening for full professorship in economics of organization/public economics. Priority will be given to candidates with substantial publications in international journals, mainly in the field of organization theory, including public organizations, with a special interest for the embeddedness of organizations in their institutional environment. Candidates with acknowledged expertise in the economics of infrastructures will also receive particular attention. The selected candidate will benefit from an  exceptional research environment (he/she will be affiliated to the Centre d’Economie de la Sorbonne -CES), from a pool of potential Ph D students of very high quality, and from substantial research opportunities. (S)he will also benefit from the exceptional position of Paris at the international research crossroad. Speaking French is not compulsory upfront although some rudiments would help. However, the candidate is expected to develop French proficiency in the future so as to be able to teach at the advanced undergraduate level. The deadline is not yet known, but should be posted soon on the following site: http://centredeconomiesorbonne.univparis1. fr/bandeau-haut/recrutement/. Seminars will be organized with selected candidates in the first months of 2012, with a final decision expected in April. For detailed information, contact Claude Ménard (menard@univparis1.fr).

Contractual completeness is a core issue in organizational economics. A colleague helpfully suggested this illustration of a nearly complete contract. Note the deliberate omission of language dealing with an extreme low-probability event (time for Nicolai and Scott to resume their debate over bounded rationality?).

The Call for Papers for the 2012 ISNIE conference, 14-16 June 2012 at the University of Southern California, is now posted. Proposals are due 30 January 2012, so start working on those abstracts!

I have been involved with ISNIE for many years and currently serve as the organization’s treasurer. The conferences are terrific, with a variety of papers, panels, and keynotes spanning the broad range of institutional and organizational social science research.

Trivia: I first met the good Professor Foss at the inaugural ISNIE conference in 1997 in St. Louis So if it weren’t for ISNIE, this blog might not exist. . . .

The Financial Times has named Abhijit Banerjee and Esther Duflo’s Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty the best business book of 2011. Here’s the book’s webpage. Here are previous O&M posts on the Banerjee-Duflo approach, which is obviously gaining momentum.

The NSF recently commissioned a set of papers on long-term research agendas in economics:

This is a compendium of fifty-four papers written by distinguished economists in response to an invitation by the National Science Foundation’s Directorate for the Social, Behavioral and Economic Sciences (NSF/SBE) to economists and relevant research communities in August 2010 to write white papers that describe grand challenge questions in their sciences that transcend near-term funding cycles and are “likely to drive next generation research in the social, behavioral, and economic sciences.” These papers offer a number of exciting and at times provocative ideas about future research agendas in economics. The papers could also generate compelling ideas for infrastructure projects, new methodologies and important research topics.

Here are a few of particular interest for O&Mers:

Challenges for Social Sciences: Institutions and Economic Development
Daron Acemoglu

Making the Case for Contract Theory
Oliver Hart

Research Opportunities in Social and Economic Networks
Matthew O. Jackson

The Economics of Digitization: An Agenda for NSF
Shane M. Greenstein, Josh Lerner, and Scott Stern

The Productivity Grand Challenge: Why Do Organizations Differ so Much?
John Van Reenen

You can find the whole set at SSRN.

O&M reader VL asks:

I have noticed an interesting link between transaction cost economics and the explanation of the long-term political units size (as Braudel would have said, on “la longue durée”). For example, it is highly probable that classical Greek poleis were being integrated and desintegrated in response to changes in the nature of military and political contracts. I wish to explore that perspective in my own doctoral thesis and I would like to ask for your help. Do you know about any work that examines that matter? I have read books of Coase, Williamson, and North, and further articles of Alchian, Demsetz, and others. But I don’t know of any work treating organization economics from a political anthropological or political historical perspective.

I suggested privately that he look at David Friedman’s 1977 JPE paper and recent work by Alberto Alesina and coauthors, though none of these works from a transaction cost perspective. Can the rest of you offer some suggestions? If not TCE, then how about resource-based, dynamic capabilities, or property-rights perspectives on the boundaries of the polis?