NIE and Development Theory.docx

1、NIE and Development TheoryThe New Institutional Economics and Development Theory:A Brief Critical AssessmentPRANAB BARDHANUniversity of California, BerkeleySummary. In this paper we discuss strengths and weaknesses of transaction-cost and imperfect-information approaches to the economic theory of in

2、stitutions, particularly with references to problems relevant to economic development.1. ALTERNATIVE THEORLESIn recent years two strands of non Walrasian economic literature have developed well-articulated endogenous theories of institutions, and they are both getting to be prominent in the new micr

3、oeconomics of development One is the transaction cost school flowing out of the famous paper by Coase (1960), followed by the writings of Alchian, Demsetz, Williamson, North and others; the other school is associated with the theory of imperfect information as in the work of Akerlof, Stiglitz, Spenc

4、e and others. Although there is some family resemblance between the two strands, there are important differences in their points of emphasis. But they both deny the validity of some of the principal results of mainstream economics. For example, one of the main pillars of Walrasian neoclassical econo

5、mics the separability of equity and efficiency-breaks down when transaction costs and efficiency; the terms and conditions of contracts in various transactions, which directly affect the efficiency of resource allocation, now crucially depend on ownership structures and property relations. Developme

6、nt economics, which deals with cases where market failure and incomplete markets (often the result of the substantive presence of transaction costs and information problems) are predominant, clearly provides hospitable territory for such institutional analysis.According to the transaction costs scho

7、ol, institutions that evolve to lower these costs are the key to the performance of economies. These costs include those of information, negotiation, negotiation, monitoring, coordination and enforcement of contracts. When transaction costs are absent, the initial assignment of property rights does

8、not matter from the point of view of efficiency, because rights can be voluntarily adjusted and exchanged to promote increased production. But when transaction costs are substantial, as is usually the case, the allocation of property rights is critical. In the historical growth process there is a tr

9、adeoff between economies of scale and specialization on the one hand and transaction costs on the other. In a small, closed, face-to-face peasant community, for example, transaction costs are low, but the production costs are high, because specialization and division of labor are severely limited by

10、 the extent of market defined by the personalized exchange process of the small community. In a large-scale complex economy, as the network of interdependence widens the impersonal exchange process gives considerable scope for all kinds of opportunistic behavior (cheating, shirking, moral hazard) an

11、d the costs of transacting can be high. In Western societies over time, complex institutional structures have been devised (elaborately defined and effectively enforced property rights, formal contracts and guarantees, corporate hierarchy, vertical integration, limited liability, bankruptcy laws and

12、 so on) to constrain the participants, to reduce the uncertainty of social interaction, in general to prevent the transactions from being too costly and thus to allow the productivity gains of larger scale and improved technology to be realized. North and Thomas (1973) have explained economic growth

13、 of Western Europe between the 10th and the 18th centuries primarily in terms of innovations in the institutional rules that governed property rights. In this view, as in Marxist history, property relations which were socially useful at one time become “fetters” on the further development of the for

14、ces of production, and an appropriate redefinition of property rights becomes necessary. New property rights emerge that allow an increase in gains from trade by economizing on transaction costs (including gains from new production or earlier high transaction costs and the consequent“market failure”

15、). North and many other neoclassical institutional economists believe that the basic source of institutional change is fundamental and persistent changes in relative prices, which lead one of both parties in a transaction to perceive that they could be better off under alternative contractual and in

16、stitutional arrangements. Historically, population change is judged to have been the single most important source of relative price changes, though technological change (including that in military technology) and changes in the costs of information are also deemed as major sources.The imperfect-info

17、rmation theory of institutions is closely related to that of transaction costs, since information costs constitute an important part of transaction costs. But the former theory is usually cast in a more rigorous framework clearly spelling out assumptions and equilibrium solution concepts, drawing ou

18、t more fully the implications of strategic behavior under asymmetric information and sharply differentiating the impact of different types of information problems. Imperfect-information theory yields somewhat more concrete and specific predictions about the design of contracts, with more attention t

19、o the details of terms and conditions of varying contractual arrangements under varying circumstances, than the usual presentations of transaction cost theory. Exceptions in the latter are provided by Williamsons theory of transaction-specific assets and his theory of incomplete contracts as further

20、 developed by Hart and Holmstrom (1987). The latter focus on adaptive sequential decision-making rather than the comprehensive contingent claims contracts of the imperfect-information literature. The imperfect-information theorists give more emphasis to ex ante mechanism design in contracts and less

21、 to maladaptation costs incurred when transactions drift out of alignment ex post in a world of bounded rationality where contracts are necessarily incomplete (i.e. cannot possibly take into account all contingencies). In particular, once relation-specific investments (i.e. where the investments the

22、 parties make have a much greater use inside the relationship than outside) are made, there is scope for post-contractual opportunistic behavior. Institutional devices to reduce this consist usually of long-time contractual relations or integration of firms (converting an arm-length transaction into

23、 an internal one and defining property rights as the default option in incomplete contracts). Longterm implicit contracts and personalized, less-than-arms-length transactions are, of course, quite common in developing countries, although Williamsons immediate concern is with the corporate structure

24、and practices in industrially advanced countries.The imperfect-information theory has been fruitfully used in modeling many key agrarian institutions, which are seen to emerge as substitutes for missing credit, insurance, and futures markets in an environment of pervasive risks, information asymmetr

25、y, and moral hazard. It started with the literature on sharecropping, then on interlocking of transactions in labor, credit and land lease, on labor tying, on credit rationing and so on. Radical economists have often cited some of these production relations as institutional obstacles to development

26、in a poor agrarian economy, overlooking the microeconomic rationale of the formation of these institutions. Under a set of informational constraints and missing markets, a given agrarian institution (say, sharecropping of interlocking of contracts) may be serving a real economic function Its simple

27、abolition, as is often demanded on a radical platform, without taking care of the factors that gave rise to the institution in the first place, may not necessarily improve the conditions of the intended beneficiaries of the abolition program. There may be some important political lessons here from w

28、hat can be called the economics of second-best reformism.2. FUNCTIONALISM AND OTHER LIMITATIONSThe transaction-cost and imperfect-information theories are equally murky on the mechanism through which new institutions and property rights emerge. One gets the impression that more efficient institution

29、s and governance structures evolve as the parties involved come to appreciate the new benefit-cost possibilities. The literature is marked by a certain ahistorical functionalism and even vulgar Darwinism on this point An institutions mere function of serving the interests of potential beneficiaries

30、is clearly inadequate in explaining it, just as it is an incompetent detective who tries to explain a murder mystery only by looking for the beneficiary and, on that basis alone, proceeds to arrest the heir of the murdered rich man One cannot get away from the enormity of the collective action probl

31、em that limits the ability of potential gainers to get their act together in bringing about institutional changes. There are two kinds of collective action problems involved here; one is the well known free-rider problem about sharing the costs of bringing about change the other is a bargaining prob

32、lem where disputes about sharing the potential benefits from the change may lead to a breakdown of the necessary coordination We have noted before the neoclassical institutional economists strong belief that relative price changes fuel the main motive force for institutional changes in history (prim

33、arily by inducing the development of property rights to the benefit of the owners of the more expensive factor of production). In particular, demographic changes altering the relative price of labor to land lead to the incentive for redefinition of property rights on land and a rearrangement of labor relations: North (l981) and Hayami and Ruttan (1985) give sev