Institutional Design and Innovation: Discussion

Abstract

There are four basic components of any economic environment: endowments, technology, preferences, and institutions. Because economists typically focus on environments in which there is little variation in basic institutions, the role of institutions is often only implicit. Yet, while the first three are necessary they are not sufficient; for instance, the system of property rights links the endowments with agents and their preferences, and the outcome depends on the initial distribution of that endowment. There are reasons beyond these fundamental considerations to focus on institutions. One of the most enduring puzzles in economics and economic history is the limited participation among countries in modern economic growth. What has accounted for the enormous success of the few and lack of it by the many? A number of investigators have stressed the importance of institutional change and its relationships to technological change (see for instance Hicks, North, Hayami and Ruttan, Feeny). The effects of institutions on economic performance and even more importantly on the investigation of the determinants of the evolution of institutions and their role in economic change are topics which should be high on the agenda in the social sciences. The three papers in this session reflect that priority. One approach in institutional economics, one that has in general been dominant, is to harness the power of deductive reasoning to determine the effects of an institution on economic performance. Although this approach is found in all three papers, it is most apparent in the paper by Hurwicz. Incentive compatibility, enforceability, and informational efficiency are important determinants of feasibility in institutional design. A more recent approach in institutional economics is the explicit modeling of institutional change and testing against historical and/or contemporary evidence. The Evenson and Putnam and Lin papers are examples. Evenson and Putnam provide a concise narrative of the evolution of intellectual property rights in the United States and at the international level with a focus on agriculture. Like Hurwicz, their paper in part reflects an examination of various institutional arrangements according to evaluative criteria. Changes in patent law and interpretation through court decisions in the United States in the period from 1787 to 1862 produced a real-world system that closely corresponds to their criteria for an effective patent system. Their analysis highlights the growing precision and enforceability of patent rights that served the interests of the innovator and the requirements for disclosure that served general welfare. The rich narrative in the Evenson and Putnam paper deserves a more thorough complementary investigation within a model of institutional change. The United States began with the precedents of English and colonial practice and a belief in the progress of science. The series of patent laws that followed should be examined more explicitly within a model in which property rights are endogenous. What were the sources of the demands for more precise intellectual property rights? Was this demand derived from the demand for mechanical technical change in a land-abundant laborscare nineteenth century U.S. economy? Was this demand broadly articulated because of the easy entry into mechanical innovation by yeoman inventors? Did the embodied nature of mechanical technical change in conjunction with the processes of learning by doing and learning by using create special pressures for intellectual property rights to protect investments specific to the manufacture of mechanical devices? What was the role of patent disputes as a focusing device in affecting both new legislation and the evolution of case law? Important issues remain to be resolved. Lin provides an illuminating and creative The author is an associate professor in the Departments of Economics and Clinical Epidemiology and Biostatistics, McMaster University.