Stéphane Straub
U. of Edinburg

Straub

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(Wednesday, 17th May 2006)

Title : On the emergence of institutions

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As Bardhan (2005) points out, to date the literature on the economic analysis of social and political institutions have focused mainly on their role as protectors of property rights. A more neglected role of institutions is to correct the coordination failures or commitment problems that sometimes plague the most basic type of economic interactions. These problems, that can remain even if property rights are secure, are likely to be critical for an economy at the initial stages of its development. Previous works on the role of institutions as coordination devices have mainly explored two related lines of enquiry. First, they have analyzed in great detail the internal functioning of specific institutional arrangements, sometimes relating them to relevant game-theoretical mechanisms (See Greif, 1997, for a survey of the economic history literature that relies on micro-economic theory to study institutions). Second, a few economic contributions have aimed to improve our understanding of how informal or personalized relationship-based institutions may coexist with more formal, anonymous mechanisms, and of how the transition from one to the other may occur (see for ex. Kranton, 1996, and Dixit, 2004).

As most of these contributions are aimed at describing institutions already in place, or the transition between existing systems, very little is known on the environmental and individual factors that lead to the emergence, possibly at varying levels of efficiency, of such institutional frameworks. The aim of this workshop is to present a model of the process through which such institutions may or may not arise. An institution is modelled here as a coordination device, a body in charge of enforcing agreements or conventions that ultimately increase the efficiency of economic interactions between agents. In the words of Greif (1997), it is a non-technological set of constraints on behavior, which are self-enforcing. This self-enforcing nature of the institutions is modelled through a game agents play in a hypothetical state of nature. Depending on the existing incentives, players' actions will eventually lead to the establishment of a coordinating mechanism as equilibrium of that game. Therefore, our analysis of the process of institution creation can be relevant to different economic contexts, such as a tribe developing formal trade exchanges, a group of firms and clients in a given industry, a country in transition to an industrialized economy, or even a set of countries faced with some international coordination issue.

Bibliographical references :

Must read reference : Greif, A. 1997. Microtheory and Recent Developments in the Study of Economic Institutions through Economic History. In D.M. Kreps and K. F. Wallis, eds., Advances in Economic Theory (vol. 2). New York: Cambridge University Press.
http://www-econ.stanford.edu/academics/grief_228/Microtheory.pdf

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Bardhan, P.K. 2005. Scarcity, conflicts and cooperation: essays in the political and institutional economics of development. Massachusetts: MIT Press. Chapters 1 and 2.

Dixit Avinash. 2004. Lawlessness and Economics: Alternative Modes of Governance. Princeton University Press. Especially Chapter 1.

Kranton Rachel 1996. Reciprocal Exchange: A Self-sustaining System. American Economic Review 86: 830-851.

Straub

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(Monday, 21st May 2007)

Title : Coordination and institutions: A review of game-theoretic contributions

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Coordination problems are pervasive in economic and social interactions. In a variety of settings, “institutions” have emerged to address these problems and allow more efficient outcomes. In this workshop, I will review how simple game theoretic tools (such as the prisoners’ dilemma) have been used in the literature to address different aspects of this process, and what insights we have gained from this literature. These aspects include (see more references in Sánchez-Pagés and Straub, 2007):

  • The way institutions function (Milgrom et al. 1990; Greif 1993);
  • The fact that different types of institutions (e.g. formal and informal ones) can coexist (Dixit 2004);
  • Social capital, understood as a form of informal institutional arrangement (Durlauf and Fafchamps 2006)
  • The emergence of institutional coordination mechanisms (Sánchez-Pagés and Straub 2007).

Bibliographical references :

Must read reference : Sánchez-Pagés Santiago and Stéphane Straub. The emergence of institutions. Mimeo, University of Edinburgh.
Must read reference : http://ideas.repec.org/p/edn/esedps/148.html

Bardhan, P.K. 2005. Scarcity, conflicts and cooperation: essays in the political and institutional economics of development. Massachusetts: MIT Press. Chapters 1 and 2.

Dixit Avinash. 2004. Lawlessness and Economics: Alternative Modes of Governance. Princeton University Press.
(Chapter 1 available at http://press.princeton.edu/titles/7729.html)

Durlauf, S. and M. Fafchamps. 2006. Social Capital. In Handbook of Economic Growth, P. Aghion and S. Durlauf, Eds., North Holland: Amsterdam.
http://ideas.repec.org/h/eee/grochp/1-26.html

Greif, A. 1993. Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition. American Economic Review, 83, 525-48.

Milgrom, P., D. North and B. Weingast. 1990. The Role of Institutions in the Revival of Trade: The Medieval Law Merchant, Private Judges and the Champagne Fairs. Economics and Politics, 1, 1-23.

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