New Institutional Economics: A Guidebook

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New Institutional Economics

Institutions frame behaviors and exchanges in markets, business

networks, communities, and organizations throughout the world.

Thanks to the pioneering work of Ronald Coase, Douglass North, and

Oliver Williamson, institutions are now recognized as being a key factor

in explaining differences in performance between industries, nations,

and regions. The fast-growing field of “new institutional economics”

(NIE) analyzes the economics of institutions and organizations using

methodologies, concepts, and analytical tools from a wide range of dis￾ciplines (including political science, anthropology, sociology, manage￾ment, law, and economics). With contributions from an international

team of researchers, this book offers theoreticians, practitioners, and

advanced students in economics and social sciences a guide to the recent

developments in the field. It explains the underlying methodologies,

identifies issues and questions for future research, and shows how results

apply to decision-making law, economic policy, managements, regula￾tions, and institutional design.

eric brousseau is Professor of Economics at the University of Paris

X and Director of EconomiX, a research center jointly operated

by University of Paris X and the CNRS (French National Science

Foundation).

jean-michel glachant is Professor of Economics and Head of the

Electricity Reforms Group in the ADIS Research Center, University of

Paris-Sud XI.

New Institutional Economics

A Guidebook

Edited by

Eric Brousseau and Jean-Michel Glachant

CAMBRIDGE UNIVERSITY PRESS

Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo

Cambridge University Press

The Edinburgh Building, Cambridge CB2 8RU, UK

First published in print format

ISBN-13 978-0-521-87660-5

ISBN-13 978-0-521-70016-0

ISBN-13 978-0-511-43683-3

© Cambridge University Press 2008

2008

Information on this title: www.cambridge.org/9780521876605

This publication is in copyright. Subject to statutory exception and to the

provision of relevant collective licensing agreements, no reproduction of any part

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Cambridge University Press has no responsibility for the persistence or accuracy

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and does not guarantee that any content on such websites is, or will remain,

accurate or appropriate.

Published in the United States of America by Cambridge University Press, New York

www.cambridge.org

paperback

eBook (EBL)

hardback

To the more than six hundred fellows who have been

teaching, thinking, learning, discussing, sharing meals,

and even dancing at the European School for New

Institutional Economics (ESNIE) every spring in

Corsica since 2002

Contents

List of tables page x

List of figures xi

List of contributors xiii

Acknowledgements xxi

Foreword xxiii

oliver e. williamson

A Road Map for the Guidebook xxxix

eric brousseau and jean-michel glachant

Introduction to New Institutional Economics: A Report Card 1

paul l. joskow

Part I Foundations 21

1 The Theories of the Firm 23

pierre garrouste and st
ephane saussier

2 Contracts: From Bilateral Sets of Incentives to the

Multi-Level Governance of Relations 37

eric brousseau

3 Institutions and the Institutional Environment 67

john nye

4 Human Nature and Institutional Analysis 81

benito arrunada ~

Part II Methodology 101

5 The “Case” for Case Studies in New Institutional

Economics 103

lee j. alston

vii

6 New Institutional Econometrics: The Case of Research

on Contracting and Organization 122

michael e. sykuta

7 Experimental Methodology to Inform New Institutional

Economics Issues 142

st
ephane robin and carine staropoli

8 Game Theory and Institutions 158

thierry p
enard

Part III Strategy and Management 181

9 New Institutional Economics, Organization, and Strategy 183

jackson nickerson and lyda bigelow

10 Inter-Firm Alliances: A New Institutional Economics

Approach 209

joanne e. oxley and brian s. silverman

11 Governance Structure and Contractual Design in Retail

Chains 235

emmanuel raynaud

Part IV Industrial Organization 253

12 Make-or-Buy Decisions: A New Institutional

Economics Approach 255

manuel gonz
alez-d
iaz and luis v
azquez

13 Transaction Costs, Property Rights, and the Tools of

the New Institutional Economics: Water Rights and

Water Markets 272

gary d. libecap

14 Contracting and Organization in Food and Agriculture 292

michael l. cook, peter g. klein, and

constantine iliopoulos

Part V Institutional Design 305

15 Buy, Lobby or Sue: Interest Groups’ Participation in

Policy Making: A Selective Survey 307

pablo t. spiller and sanny liao

viii Contents

16 Regulation and Deregulation in Network Industry 328

jean-michel glachant and yannick perez

17 Constitutional Political Economy: Analyzing

Formal Institutions at the Most Elementary Level 363

stefan voigt

18 New Institutional Economics and Its Application on

Transition and Developing Economies 389

sonja opper

Part VI Challenges to Institutional Analysis 407

19 Law and Economics in Retrospect 409

antonio nicita and ugo pagano

20 The Theory of the Firm and Its Critics: A Stocktaking

and Assessment 425

nicolai j. foss and peter g. klein

21 The Causes of Institutional Inefficiency: A Development

Perspective 443

jean-philippe platteau

Notes 463

References 489

Index 543

Contents ix

Tables

2.1 Contract enforcement: two visions and two issues page 52

5.1 Percentage of hectares devoted to pasture or

permanent crops 110

5.2 Seniority of Southern Democratic Congressmen:

1947–1970 118

5.3 Seniority of Southern Democratic Congressmen:

1947–1970 119

8.1 A standardization game 160

8.2 The prisoners’ dilemma 169

10.1 Alliance motives and cooperative challenges 214

10.2 Alliance as Hybrid Governance Structures 218

16.1 The principal forms of governance structures in

network industries 342

19.1 First-order jural relations (authorised transaction) 419

19.2 Second order legal relations (authoritative transaction) 420

x

Figures

5.1 The demand for, and evolution of, property rights page 106

5.2 Comparison: Argentina (GDP per capita)

and other top countries 114

8.1 A principal–agent game 163

8.2 A principal–agent relation with institutional commitment 165

8.3 Principal–agent game under imperfect information 167

8.4 The trade-off between short-term temptation to cheat

and long-term costs under trigger strategies 171

10.1 NIE research on the seven questions about alliances 216

12.1 The choice of the governance mechanism 260

12.2 (a) Governance costs; (b) Governance costs with an

institutional change 268

13.1 Mean transfer prices for agriculture-to-urban-and￾environmental uses and for agriculture-to-agriculture

and other transactions 277

13.2 Annual water transfers from agriculture-to-non-agricultural

uses in twelve western states, 1987–2003 277

13.3 Water transfers, 1987–2003, by category 278

14.1 Evolution of food system inter-firm coordination

research 294

15.1 Court’s best response to information 319

16.1 From market design to market building: sequencing

the reform modularity 346

16.2 An example of sub-modularity within the module

“monopoly transmission network.” (After Rious 2005) 350

16.3 The Macintyre (2003) introduction to veto

player problems 357

18.1 Three levels of Williamson analysis 391

20.1 Conflict in organizations 427

21.1 Illustrating interdependence between production and

transaction costs: the U-shaped versus the star-shaped

irrigation systems 446

xi

Contributors

LEE J. ALSTON is Professor of Economics and Director of the Program

on Environment and Society in the Institute of Behavioral Sciences at

the University of Colorado. He is a research associate at the National

Bureau for Economic Research and is a past president of the Inter￾national Society for New Institutional Economics (ISNIE). His

current research focuses on the political economy of the historical

USA and present-day Latin America, and on issues of land use and

agricultural contracting in North and South America.

BENITO ARRU NA D A ~ , Professor of Business at Pompeu Fabra University,

Barcelona, has published widely on organizations and institutions in,

among others, the Journal of Law & Economics; Industrial and Corporate

Change; Harvard Business Review; the Journal of Law, Economics &

Organization; the Journal of Economic Behavior & Organization; and the

International Review of Law and Economics. The interaction between the

law and private enforcement is a recurrent theme of many of his works.

His latest projects deal with the institutions that make impersonal

transactions possible in a market economy, focusing on cognitive

property rights, and formalization issues.

LYDA BIGELOW is an assistant professor of strategy at the University of

Utah’s Dave Eccles School of Business. Prior to this she held the

position of assistant professor at Washington University’s Olin School

of Business. Her research lies at the intersection of population ecology

and transaction economics by studying how organizational and tech￾nology choices affect firm performance.

eric brousseau is Professor of Economics at the University of Paris X

and a member of the Institut Universitaire de France. He is the director

of EconomiX, a joint research center between the CNRS and the

University of Paris X. He is also the director of the European School for

New Institutional Economics (ESNIE). His research agenda focuses

on the economics of institutions and on the economics of contracts,

xiii