New Institutional Economics An Evolutionary View of the

New Institutional Economics: An Evolutionary View of the Literature James N. Barnes, Ph. D. Assistant Professor of Rural Development Department of Agricultural Economics & Assistant Clinical Professor of Family Medicine Department of Family Medicine Oklahoma State University Stillwater, OK 74078 Phone: 405. 744. 9825 E-Mail: barjn@okstate. edu 1

The Journey Ahead ►What Is New Institutional Economics (NIE)? ►NIE and Theories of the Firm ►Concluding Remarks 2

New Institutional Economics: Some Attributes ► Klein (2000, p. 1) has defined NIE as: “…an interdisciplinary enterprise combining economics, law, organization theory, political science, sociology and anthropology to understand the institutions of social, political and commercial life. ” ► NIE can be broadly divided into the study of the institutional environment and institutional arrangements given positive transaction costs. ► NIE is similar to ‘Institutional Economics’ (Veblen, Commons) ► NIE is dissimilar to ‘Neoclassical Economics’ 3

New Institutional Economics: Origins ► The emphasis in the NIE on positive transaction costs derives from the work of Coase (1937; 1960) (Eggertsson, 1990). Contemplation of an optimal system may provide techniques of analysis that would otherwise have been missed and, in certain special cases, it may go far to providing a solution. But in general its influence has been pernicious. It has directed economists attention away from the main question, which is how alternative arrangements will actually work in practice. It has led economists to derive conclusions for economic policy from a study of an abstract of a market situation. (Coase, 1945, p. 195) ► Core focus is to understand how transaction costs shape both institutional environment and institutional arrangements/contracts/governance structures. ► Finally, policy analysis should be guided by ‘comparative institutional analysis’ (Coase, 1964) 4

New Institutional Economics: An Overview 5

Transaction Cost Economics (TCE) ► Williamson’s (1975; 1985; 1991) TCE has been called the ‘make-or-buy’ or ‘outsource’ framework; it has been used to study vertical integration ► Two behavioral assumptions are important ► Transaction is the unit of analysis and has three attributes ► Asset specificity and the TCE approach defined ► Five types of asset specificity exist: site, physical, human, dedicated and temporal ► Empirical tests of the TCE hypothesis 6

NIE and Theories of the Firm TCE Agency Property Rights Coase (1937) Behavioral Assumptions Bounded rationality and opportunism Rationality and opportunism Bounded rationality ? Types of Costs Maladaptation due to shirking Monitoring and shirking Bargaining over control of asset Search, bargaining, enforcement Unit of Analysis Transaction Contract Transaction/asset Transaction Ex post Ex ante, perhaps Ownership and Control Separate? No Yes No No Vertical Boundary? Yes No Yes VI/Internal organization preferred when investments are relationship specific VI/Internal organization preferred as value of residual control increases VI/Internal organization preferred as value of excludable rights over asset increases VI/Internal organization preferred for similar transactions 1 2 2 - Incentive Alignment Organization Hypothesis Empirical Rank 7

Concluding Remarks ► It is harvest time ► It is time to design extension programs using NIE principles of organization ► It is time for action; more agricultural economists are needed 8

Questions? James N. Barnes, Ph. D. Assistant Professor of Rural Development Department of Agricultural Economics Oklahoma State University 405. 744. 9825 barjn@okstate. edu 9