Archive for January, 2013

Arrunada Seminar: Nuno Garoupa – From the Washington Consensus to Arruñada’s Institutional Foundations of Impersonal Exchange

| Nuno Garoupa |

From the Washington Consensus to Arruñada’s Institutional Foundations of Impersonal Exchange

Since the Washington Consensus and the deregulation movement took place thirty years ago, administrative simplification and reduction of bureaucracy has been on the agenda of policymakers. In fact, economists tended to agree that a strongly market-based approach requires an effective public administration imposing light burdens on economic players (thus creating a business-friendly economic environment). This view was later popularized by De Soto’s The Other Path in 1989 which inspired the work of many international organizations and the (by now) famous Doing Business Project in the late 1990s. Simplification, cutting red tape, one-stop bureaucratic agencies, reduction of licenses and procedures, de-formalizing business activities have become popular slogans with many governments around the world.

The important work of Benito Arruñada takes a fresh look at these issues. We all know that the Washington Consensus promotes deregulation, but it also defends strong legal security for property rights (understood in a nontechnical way, that is, both rights in rem and rights in personam) in the tradition of Coase, Williamson and North. In his book, Arruñada convincingly shows that certain simplifications of procedures and some forms of de-formalization actually hurt important safeguards. In other words, there could be an intrinsic and convoluted trade-off between the popularized programs of administrative simplification and adequate legal certainty. Eliminating certain formalisms might save some apparent costs in the immediate, but augment considerably transaction costs in time, therefore damaging the proper functioning of markets.

Economists have a tendency to see formalism as an example of capture by private interests, thus promoting rents, increasing transaction costs and, as a consequence, damaging business activity (including business creation and investment) and economic growth. In the context of contractual registries, Arruñada explains that some formalism responds to efficient institutional design precisely to reduce transaction costs and facilitate impersonal exchange. More importantly, in the absence of such formalism, efficient transactions might not take place and market failures could be more acute.

My understanding of the policy implications from Arruñada’s work is simple. First, not all simplification is good, not all formalism is bad. A degree of formalism is important to promote development and trade in a globalized world of impersonal exchange. Second, when de-formalizing, policymakers should consider the extent to which they are eliminating unnecessary procedures (those in place to satisfy mainly a few particular private interests) and not institutions governing property rights protection. Finally, the appropriate formalization in the context of contractual registries (for property as well as for business transactions) responds to a set of determinants identified by Arruñada that could vary across jurisdictions. Concerning de-formalizing, there is no such thing as a “one-size-fits-all” policy.

Professor Nuno Garoupa. H. Ross and Helen Workman Research Scholar. Co-Director, Illinois Program on Law, Behavior and Social Science

7 January 2013 at 10:12 am 3 comments

Arrunada Seminar: Amnon Lehavi – Economics, Property Rights, and Third Parties

| Amnon Lehavi |

Economics, Property Rights, and Third Parties

Benito Arruñada’s book offers an innovative and intriguing analysis of the crucial role that institutions such as land registries play for securing property rights. A key observation that Benito makes deals with the different focus that economists have vis-à-vis lawyers in their view of property. While “everybody agrees that security of property is essential for development” (p. 24), Benito argues that economists tend to be more concerned with the public order function of property, one which guards against violence and confiscation and which then allows for parties to engage in subsequent efficient bilateral transactions, as modeled by Coase and others. But as Benito aptly notes, lawyers are also concerned with a different aspect of securing property rights, one which has to do with otherwise “routine” property dealings that may fall prey to misuse of transactions. Such conflicts can arise, for example, between a good faith purchaser of an asset and the original owner whose property has been deprived by an intermediate party and then “sold” on the market. Sticking to a contractual paradigm, one that is simply assumed by economists, may thus come short in identifying the true complexity of property rights.

To more fully protect against potential abuse of property rights, or against other cases undermining the security of title, the legal system should be able to award remedies to property owners to protect their interests not only vis-à-vis the direct party to the transaction but also vis-à-vis third parties (in rem protection). This is where land registries come into play. These institutions provide the mechanisms which ensure that private rights would be broadly enforced, “good against the world.” The publicity granted to property rights through such registries and the guarantee of good title, especially in those jurisdictions which follow the registration (Torrens) system, add a key feature of certainty to property rights, one that may be missing from standard economic analysis. Benito’s book offers a unique contribution in identifying the economic and legal foundations of such institutions. His work should be closely studied by scholars across all fields.

Amnon Lehavi
Atara Kaufman Professor of Real Estate, Radzyner School of Law
Academic Director, Gazit-Globe Real Estate Institute Interdisciplinary Center (IDC)

4 January 2013 at 4:17 am 2 comments

Arrunada Seminar: John Nye – Formalization and “Optimal” Regulation

| John Nye |

Formalization and “Optimal” Regulation

Benito’s work on titling and formalization seems to serve as an excellent illustration of the problem of “optimal” regulation.  Much of the debate about state vs. market presupposes a clear-cut distinction between private and public spheres.  But as Benito’s complex discussion of the evolution of formalization and the choices involved in selecting appropriate titling or registration systems shows, the creation of good institutions that protect and enhance property often involve conflicts between different levels of regulatory power (local vs. national) and conflicts between well-functioning but non-scaleable local norms and more cumbersome but universally applicable formal rules.  What are the advantages of systems that allow at least some functioning property arrangements in developing societies but which constrain the creation of more effective systems as the nation grows?  Do central systems that work closer to the ideal and minimize transactions cost presuppose too much of the state capacity that is often lacking in many nations?  Does a well-functioning central system of registration enhance state capacity with greater use or does it encourage unwanted Leviathan by transferring too much power to the State? Consider a country like the People’s Republic of China that did not even have formal private property till a few years ago: Should the state be using its period of authoritarian powers to impose new and theoretically “sensible” rules that might be easier to propose now than later or should it tread lightly and experiment with varieties of local arrangements in the hope of finding which sets of rules work best in a Chinese context, while running the risk that such arrangements may congeal with success and become difficult to reverse?

I’m sure the specific issues of titling, registration, and formalization that Benito discusses will be well treated by those with more specific expertise in these areas.  But I also hope we will see some commentary on these broader issues of evolutionary problems in the construction of liberal states.

John V.C. Nye
George Mason University and Higher School of Economics, Moscow

3 January 2013 at 11:33 am 2 comments

Arrunada Seminar: P.J. Hill – The Importance of Sequential Exchange

| P. J. Hill |

The Importance of Sequential Exchange

Arruñada’s important contribution to the vast literature on institutions and exchange comes from a concept that has been largely ignored by previous contributors (including me), namely the sequential nature of exchange. Most of us have treated the definition and enforcement of property rights as important for exchange, but we have not thought seriously about the ongoing nature of such exchange. If specialization and impersonal exchange are going to occur, the transfer of a property right will be repeated numerous times. Arruñada has integrated well the sequential nature of exchange into his analysis. That integration leads to a host of insights about informality, property registers, and the trade-offs that come from lowering the transaction costs of exchange versus the strength of property rights. How did so many of us miss such an important concept in our work on property rights and the exchange of those rights?

P.J. Hill
Professor Emeritus, Wheaton College and Senior Fellow, Property and Environment Research Center (PERC)

3 January 2013 at 11:22 am 2 comments

Arrunada Seminar: Grand Opening

| Lasse Lien |

Today we are proud to launch a virtual seminar over Benito Arruñada’s important new book: Institutional Foundations of Impersonal Exchange: Theory and Policy of Contractual Registries (U. of Chicago Press).

First, what on earth is a virtual seminar? In this case a virtual seminar means that we over the next two weeks will launch a series of posts that address issues in Arruñada’s book, or issues that are inspired by issues in Arruñada’s book. Our hope is that many of you will join the discussion by adding your reflections, objections, or thoughts under the lead posts in the usual O&M way. Please note that if you haven’t had the time to read the book, but have thoughts on the subjects brought up or think additional subjects should be brought up, don’t let that stop you. We want to hear your thoughts!

Who is Benito? Benito is Professor of Business Organization at the Department of Economics and Business at Pompeu Fabra University, Barcelona. Prior to joining Pompeu Fabra and after graduating from the universities of Oviedo and Rochester, he held positions at the Universities of Oviedo and León, and was John M. Olin Visiting Scholar in Law and Economics at Harvard Law School. He has also taught at the Universities of Paris (I and X), Frankfurt, Autónoma de Madrid and Pablo de Olavide in Seville, and visited UC Berkeley, Washington and George Mason Universities. Benito Arruñada was a member of the founding board of directors and served as President (2005-2006) of the International Society for New Institutional Economics, ISNIE. And most prestigious of all; he is a former guest blogger at O&M.

What about the book? As the title reveals, the essence of the book is the institutional foundations for impersonal exchange. If you are reading a blog called Organizations and Markets, it seems safe to assume that you will find this topic interesting and profoundly important. To flesh it out a bit more, what could be better than to let Benito himself explain the main thrust of the book:

| Benito Arruñada |

Governments and development agencies spend considerable resources building property and company registries to protect property rights. When these efforts succeed, owners feel secure enough to invest in their property and banks are able use it as collateral for credit. Similarly, firms prosper when entrepreneurs can transform their firms into legal entities and thus contract more safely. Unfortunately, developing registries is harder than it may seem to observers, especially in developed countries, where registries are often taken for granted. As a result, policies in this area usually disappoint.

In this book, I have aimed to avoid such failures by deepening our understanding of both the value of registries and the organizational requirements for constructing them. Presenting a theory of how registries strengthen property rights and reduce transaction costs, I analyze the major tradeoffs and propose principles for successfully building registries in countries at different stages of development. The focus is on land and company registries, explaining the difficulties entailed, including current challenges like the subprime mortgage crisis in the United States and the dubious efforts being made in developing countries toward universal land titling. But the analytical framework covers other registries, including intellectual property and organized exchanges of financial derivatives.

Arruñada, Benito, Institutional Foundations of Impersonal Exchange: Theory and Policy of Contractual Registries, University of Chicago Press, Chicago, 2012. (Amazon site: http://ow.ly/cBMU5).

3 January 2013 at 7:57 am Leave a comment

The “Market Power” of Top Journals

| Peter Klein |

When elite academic journals impose stricter submission requirements, authors comply. When lower-ranked journals impose these restrictions, authors submit elsewhere. Key insight for editors: know your place.

Revealed Preferences for Journals: Evidence from Page Limits
David Card, Stefano DellaVigna
NBER Working Paper No. 18663, December 2012

Academic journals set a variety of policies that affect the supply of new manuscripts. We study the impact of page limit policies adopted by the American Economic Review (AER) in 2008 and the Journal of the European Economic Association (JEEA) in 2009 in response to a substantial increase in the length of articles in economics. We focus the analysis on the decision by potential authors to either shorten a longer manuscript in response to the page limit, or submit to another journal. For the AER we find little indication of a loss of longer papers – instead, authors responded by shortening the text and reformatting their papers. For JEEA, in contrast, we estimate that the page length policy led to nearly complete loss of longer manuscripts. These findings provide a revealed-preference measure of competition between journals and indicate that a top-5 journal has substantial monopoly power over submissions, unlike a journal one notch below. At both journals we find that longer papers were more likely to receive a revise and resubmit verdict prior to page limits, suggesting that the loss of longer papers may have had a detrimental effect on quality at JEEA. Despite a modest impact of the AER’s policy on the average length of submissions (-5%), the policy had little or no effect on the length of final accepted manuscripts. Our results highlight the importance of evaluating editorial policies.

2 January 2013 at 10:37 am 1 comment

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).