Samenvatting Class notes - Institutional economics and economic organizations

- Institutional economics and economic organizations
- 2020 - 2021
- Wageningen University (Wageningen University, Wageningen)
- International Development studies
184 Flashcards en notities
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Samenvatting - Class notes - Institutional economics and economic organizations

  • 1584399600 Theme 1: introduction

  • What are institutions according to Douglas North?
    Institutions are the rules of the game. Institutions are the humanly devised constraints that shape human interaction. They are made up of formal constraints (such as rules, laws, constitutions) and informal constraints (such as norms of behaviour, conventions, self-imposed codes of conduct)
  • What are two types of institutions and what do they consist?
    1. Formal institutions (legally enforced): public; laws and constitutions and private; contractual rules 
    2. Informal institutions (socially enforced); consists out of traditions, customs, norms and codes of conduct 
  • Give two examples of institutions.
    1. Marriage; formal and informal institutions, there is a contract but there is also a lot of symbolism and traditions that are related to marriage 
    2. Shaking to an agreement and signing a contract is informal and formal 
  • What are institutions according to Groenewegen?
    Institutions are rules that facilitate transactions
  • What are three types of transactions?
    1. Market transaction; between buyers and sellers 
    2. managerial transaction ; between a legal superior and a legal inferior in an organization 
    3. Political transaction ; involving decision-makers that have the legal authority to determine how the wealth in a society is distributed 
  • Transactions are organised in governance structures
  • What are the three theoretical lenses in the field of Institutional economics and Economic organization theory?
    1. Transaction cost economics 
    2. Agency theory
    3. Property rights theory 
  • The field of institutional economics and economic organizational theory
  • What are ceremonial values? Name three characteristics
    1. Traditions, rituals and myths. 
    2. For instance, sexist beliefs can be traced back to the bible (Eve was created from Adam's rib / a woman has to take care of her husband) 
    3. The power/societal position of royals   
  • What are instrumental values? Name two characteristics
    1. Functional, to solve problems, new realities create the need for new skills and knowledge 
    2. For instance, the industrial revolution made that women started working in factories 
  • What is opportunistic behaviour?
    ''Self-interest seeking with guile'', trying to gain economic benefits by using deceit, or by withholding information, or by making use of loopholes in a deal or contract
  • What are three examples of opportunistic behaviour?
    1. Shirking on the job = not putting in all the effort that you can because you know that the boss is not watching 
    2. Making a deal to produce table tops for a business partner but using inferior quality wood because the quality of the wood was not specified in the contract
    3. Selling boxes of apples but putting the best looking apples on top and the bruised apples on the bottom to deceive buyers. 
  • What is asset specificity?
    Asset specificity refers to durable investments that are undertaken in support of a particular transaction. The specificity of an seet is measured as the percentage of investment value that is lost when the asset is used outside the specific relationship.
  • What are the six types of asset specificity?
    1. Site specificity 
    2. physical asset specificity 
    3. human asset specificity 
    4. dedicated assets 
    5. brand name asset specificity 
    6. temporal asset specificity 
  • What is site specificity?
    Chickens cannot be transported over long distances so chicken farms will be located nearby slaughterhouses
  • What is temporal asset specificity?
    As soon as chickens are born (eggs hatch), the slaughter date is more or less fixed (x weeks after hatching) because if chickens get too old, then the quality of the meat deteriorates.
  • What is physical asset specificity?
    Inalfa produced sun roofs for a specific model of General Motors, the GMC Envoy. Inalfa had invested 8.5 million in setting up a specific production line for these sun roofs.
  • What are human asset specificity?
    In Inalfa personnel had to follow specific training to be able to produce the sunroofs for the GM cars.
  • What are dedicated assets?
    Assets in support of other (physical asset) investments. For example, extra storage buildings for storing the GM sunroofs at Inalfa.

  • Explain brandname asset specificity

    “All three movies in the Lord of the Rings series
    were made before the first one was released.
    Can you explain why the producer used this
    strategy instead of making the second movie
    after the first one had proven to be

    Transaction = actors selling their service to the
    movie producer

    After the first movie, the value of the actors
    has increased, their faces are connected to the
    characters in the film (brandname). Hence, the
    producer would have to pay much higher
    wages to keep the same actors in the film. 
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Laatst toegevoegde flashcards

What are the three forces of path dependence in institutional change?
  1. Large initial set-up costs when institutions are created
  2. Strong learning effects for organizations that want to take advantage of opportunities in the institutional environment
  3. Information is incomplete and fragmented, there are high transaction costs

Under such circumstances divergent paths and poor performance can persist. 
What is path dependence?
The process by which we arrive at today’s institutions is relevant and constrains future choice
What is institutional change according to the evolutionary approach?

§Institutions as an equilibrium
●Institutions come about without individual or collectivist intent
§Multiple equilibriums: history matters
●Darwinian evolution:
●Inheritance and retention
●Path dependence
What is the interest group view in the design approach?
Even though society would be better off with new property rights institutions, the distributional implications lead influential parties to oppose institutional change
Why does pressure to change existing property rights emerge?
  1. Shifts in relative prices
  2. Changes in production / enforcement technology
  3. Shifts in preferences
What is the naive view in the design approach?
Property rights arise to internalize externalities when the gains of internalization become larger than the cost of internalization
What is the design approach in institutional change?
Design institutions: to change the structure in which behaviour of actors is embedded to produce a more desirable outcome. The focus is on the design of formal public institutions (laws and regulations). An example is property rights reform.
What are the solutions for the tragedy of the commons problems (with relation to the herders)?
  1. Transform the common resources to privately owned resources, i.e. Establish private property rights. For example split the pasture in half and assign half of the meadow to one herder and the other half to the other herder.
  2. Government intervention. Central authority decides who can use the meadow, when, and for how many animals. Penalty of 2000 profit units is imposed on defectors. 
What is the tragedy of the commons and provide examples.
Central problem: how to govern common-pool resources (or common-property resources). Rival BUT non-excludable (or too costly to exclude users) 
problem: how to limit use to ensure long-term viability 
  • overfishing in oceans or lakes
  • water pollution or over-use 
  • air pollution (cars or smoking)
  • deforestation
  • animals habitat destruction   
What are the three economic benefits of the new property rights theory?
  1. Tying together residual control and residual income is key to the incentive effects of ownership
  2. §Having both residual control and residual income rights means that the decision-maker bears the financial burden of his decisions
  3. When it is possible for a single individual to have both residual control and residual income, the residual decisions made, will be efficient

  • Example: managers’ shareholdings in corporate governance
  • Example: Land-owner versus farmer who leases land