Dr Zhen Ye The University of Hertfordshire Business School Evolutionary and Institutional Evolutionary and Institutional Economics Economics Lecture 1 Emerging Paradigm and Applications Xiamen University The School of Economics April 2007 Postgraduate Lecture Series
23
Embed
Dr Zhen Ye The University of Hertfordshire Business School Evolutionary and Institutional Economics Lecture 1 Emerging Paradigm and Applications Xiamen.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Dr Zhen YeThe University of HertfordshireBusiness School
Evolutionary and Institutional EconomicsEvolutionary and Institutional EconomicsLecture 1 Emerging Paradigm and Applications
Xiamen University The School of Economics April 2007
Structure and learning outcomesStructure and learning outcomes
• Structure– Lecture 1: Emerging Paradigm and Applications– Lecture 2: Evolutionary Theorising of Economic Change– Lecture 3: Applying Evolutionary and Institutional Theories
• Learning outcomes for lecture 1– Provide an overview of evolutionary and institutional
economics – Understand the key concepts of new institutional economics
(NIE) / transaction cost economics (TCE)– Be able to apply transaction cost economics concepts in the
analysis of business venture
What are institutions?What are institutions?• The rules of the game of a society (North, 1997)• Systems of established and embedded social rules that structure
social interactions (Hodgson, 2006)• Giambattista Vico Sienza Nuova 1725 (ibid.) Latin roots:
instituere , in + statuere : to make stand; similar French usage • Institutions = or ≠ or ≡ 制度 ?• 中文“制度”一词早期用法:“凡将立国,制度不可不察也,治法
Questions?Questions?• Why are institutions important?• To what extent economic actions are underpinned by the rules
of the game of a society?• Can an individual learn without a habit of learning? • Can an organisation function without established routines?• Why is the computer keyboard layout follows the sequence
QWERTY? • Why are some production systems more successful than
others? e.g. Fordism versus Just in Time (JIT)• What do we learn from contrasting paths of economic reforms
in China and the Central and Eastern Europe (CEE) ? Experiment versus ‘big bang’
The old and new IEThe old and new IE
• Old institutional economics (OIE)– Thorstein Veblen (1898)– John Commons (1936)
• New institutional economics (NIE)– Oliver Williamson (1975)– Douglass North (1990)
• Evolutionary theorising based on both OIE and NIE – Richard Nelson and Sydney Winter (1982)– Geoffrey Hodgson (1998, 2003, 2004, 2006)
• Common linkage – importance of habit and routines – Organisational routines (Nelson and Winter, 1982) – Individual habit (Hodgson, 2006)
‘‘Routines as genes’Routines as genes’• Would learning and the attainment of skills be possible without
the acquisition of a habit?• Can an organisation function without established routines?• Routines play the role that genes play in biological theory. They
are persistent feature of the organism and determine its possible behavior (though actual behavior is determined also by the environment); they are heritable in the sense that tomorrow’s organisms generated from today’s (for example, by building a new plant) have many of the same characteristics, and they are selectable in the sense that organisms with certain routines may do better than others, and, if so, their relative importance in the population (industry) is augmented over time. (Nelson and Winter, 1982)
Routines as genes?Routines as genes?• Routines operate through the triggering of individual habit.
(Hodgson, 2006)• Habits are the necessary means of avoiding full reflection over
every detail, so that the more deliberative levels of the mind are freed up for more strategic issues. (ibid)
• Reasons and beliefs are often the rationalisations of deep-seated feelings and emotions that spring from habits that are laid down by repeated behaviours. (ibid)
• Habits replicate from individual to individual ; routines replicate from group to group and from organisation to organisation. (ibid)
• Habits are socially acquired, not genetically transmitted. • We should revisit these concepts in lecture 2 with regards to
evolutionary theorising of economic change
New institutional economics (NIE)New institutional economics (NIE)
• Governance structure– Market versus hierarchy (Williamson, 1985)
• Transaction cost – ‘The cost of using price systems’ (Coase, 1937) – The most obvious cost of ‘organising’ production through the
price mechanism is that of discovering what the relevant prices are. (ibid.)
• Dimensions of transaction• Asymmetrical information• Bounded rationality• Opportunism
• Bounded rationality– Human behaviour is ‘intendedly rational, but only limitedly
so’ (Simon, 1961)– Degree of environmental uncertainty/complexity– Recall the importance of habit and routines
• Opportunism– ‘Self interest seeking with guile’ (Williamson, 1975)– Adverse selection as ex ante opportunistic behaviour– Moral hazard as ex post opportunistic behaviour
Critical dimensions of transactionCritical dimensions of transaction
• Uncertainty/complexity & frequency• Asset specificity - the most critical dimension
– degree to which the transaction needs to be supported by transaction-specific asset
– one party may have the incentive to ‘hold up’ the other, e.g. moral hazard
• Incentives change once contract is signed• Importance of credible commitment
– the story of Ulysses and the Sirens– tactics work if the commitment is irreversible or can only be
undone at great cost (Schelling, 1960)
The hostage modelThe hostage model
Party A
Party B
Use non-specialized technology
Hold up
Don’t hold up
(½π, ½π)
(0, -C)
The hold-up threat in extensive form.
Party A
Don’t give in
Give in (0.9π, 0.1π)
Party A’s optimal strategy is to use the less-efficient technology. (Why?)
Party A incurs a sunk cost C once the contract is signed.
Use specialized technology
(¼π, ¼π)
Source: Langlois
The hostage modelThe hostage model
Party A
Party B
Use non-specialized technology
Hold up
Don’t hold up
(½π, ½π)
(-h, αh-C)
Party A
Don’t give in
Give in (0.9π , 0.1π)
The hostage — a credible commitment — is forfeit in the event of contract breach.
Use specialized technology
(¼π, ¼π)
Now suppose that Party B supplies a hostage of value αh before the game begins.
Source: Langlois
The hostage modelThe hostage model
Party A
Party B
Use non-specialized technology
Hold up
Don’t hold up
(½π, ½π)
(-h, αh-C)
h is the value of the hostage to B; α is the fraction of h that has value to A.
Party A
Don’t give in
Give in (0.9π, 0.1π)
A money deposit would have α = 1. But is an in-kind hostage a more credible commitment?
Use specialized technology
(¼π, ¼π)
Source: Langlois
The hostage modelThe hostage model
Party A
Party B
Use non-specialized technology
Hold up
Don’t hold up
(½π, ½π)
(-h, αh-C)
If αh-C > 0.1π, A will choose the more efficient specialized technology.
Party A
Don’t give in
Give in (0.9π , 0.1π)
Notice that if α = 0, hostage h doesn’t seem to affect outcome.
Use specialized technology
(¼π, ¼π)
Source: Langlois
The hostage modelThe hostage model
Party A
Party B
Use non-specialized technology
Hold up
Don’t hold up
(½π, ½π)
(-h, αh-C)
Alternative model: B gives up h as soon as chooses to hold up (but A doesn’t get αh unless he doesn’t give in).
Party A
Don’t give in
Give in (0.9π - h, 0.1π)
Even if α = 0, B has no incentive to hold up A if 0.9π – h < ½π (i.e., h > 0.4π).
Use specialized technology
(¼π, ¼π)
Source: Langlois
Some business applicationsSome business applications
• Drafting of contract and contracting problems– Short term and long term contracting implications– Payoff structure to different parties
• Design of joint venture (JV)– Investment – asset specificity
• Negotiation and bargaining– Military strategies (Schelling, 1960) and negotiation
• Supply chain management– Agency agreement and distributor commitment
• International business – Foreign market entry and mode of entry
CritiquesCritiques• Transaction cost economics relies too much on the
assumption of opportunistic behaviour – What about the role of trust? (Nooteboom et al, 1997)– Too much emphasis on opportunistic behaviour?
• Markets and hierarchies should not be viewed as two mutually exclusive governance structure – Many examples of hybrid organisational forms
• Path dependency and lock in– Why QWERTY? (David, 1985)
• Importance of understanding change and change analysis
Research assignmentResearch assignment
• Evolutionary and institutional theories as “a general theory” on “how to develop specific and varied analyses of specific phenomena” (Hodgson, 1998)
• Research, discuss and develop a case study on the evolution of Yuandang lake ( 筼筜湖 ) and its surrounding economic environment
References and further readingReferences and further reading• Coase (1937) “The nature of the firm” Economica, Vol. 4, November• Diamond, J. (2005) Collapse: how societies choose to fail or succeed
(London: Viking Books)• Langlois, R. “Economics of organisation”
http://vm.uconn.edu/~langlois/e386syl.html• Nelson, R. and Winter, S. (1982) An evolutionary theory of economic change
(Cambridge, MA: Harvard University Press) • Hodgson, G. (1998) “The approach of institutional economics” Journal of
Economic Literature, Vol. 36(1)• Hodgson, G. (2003) “The mystery of the routine: the Darwinian destiny of an
evolutionary theory of economic change” Revenue économique, Vol. 54((2) • Hodgson, G. (2004) The evolution of institutional economics: agency,
structure and Darwinism in American Institutionalism (London: Routledge) • Hodgson, G. (2006) Economics in the shadow of Darwin and Marx,
(Cheltenham: Edward Elgar) • Nooteboom, B. Berger, H. Noorderhaven, N. G. (1997) “Effects of trust and
governance on relational risk” Academy of Management Review, Vol. 40(2)
Key References (continue)Key References (continue)• North (1990) Institutions, institutional change and economic performance,
Cambridge: Cambridge University Press • Schelling (1960) The strategy of conflict, Cambridge: Harvard University
PressSimon (1961) Administrative behaviour (2nd Edn) New York: Macmillan
• Williamson, O.E. (1975) Markets and hierarchies: analysis and antitrust implications, New York: Free Press
• Williamson, O.E. (1985) The economics institutions of Capitalism: firms, markets, relational contracting, New York: Free Press
• Williamson, O.E. ( 2000 ) “ The New Institutional Economics: Taking Stock, Looking Ahead” Journal of economic literature, Vol. 38(3)