The Economics of Private Institutions: An Introduction to the Dynamics of Institutional Frameworks and to the Analysis of Multilevel Multi-Type Governance

Abstract

Summary: Private institutions are complementary, both to contracts and the public and general institutions of a society, in that they allow agents to collectively coordinate (and so benefit from economies of scale , from learning effects, and from management of externalities), while avoiding over high maladaptation costs (since they can be adapted to the specificities of a category of transactions or of a community). They depend on a principle of voluntary adhesion. Their members agree to comply ex-post with a private order. Exit can therefore hinder enforcement, potentially calling for reinforcement by public institutions. From a dynamic perspective, private institutions are the driving force of changes to institutional frameworks. They are set up to complete (or bypass) existing institutional frameworks. With the passing of time, an increasing number of economic agents can “adopt” a given private institution, making its order less negotiated and increasingly mandatory. In line with the BarzelNorth study of property rights, we believe private institutions have an impact both on the costs of creating coordination rules and on the enforcement costs of these rules. Therefore, we reveal, both in static and dynamic, firstly, the rationale behind the creation of private institutions (or a private collective order), secondly, how agents prefer to rely on a combination of various coordination devices, that compensating for each other’s weaknesses, to settle their coordination problems by minimizing transaction costs.