Institutional Economics Literature Research Articles

Human Capital: Theoretical and Empirical Insights

There is nothing more difficult to plan, more Doubtful of success, nor more dangerous to manage Than the creation of a new system. For the initiator has the enmity of all who would Profit by the preservation of the old system, and Merely lukewarm defenders in those who should gain By the new one. N. Machiavelli (1513) AbstractThe purpose of this paper is twofold. First, we want to challenge the notion of “human capital” as “education, training and work experience” and suggest that it is the “quality of the workforce” that matters, here defined as the set of characteristics that allow workers to function in a specific institutional and historical context. Our main conclusion is that the quality of the workforce is affected by the institutional environment where the workers live and that therefore it can vary across countries and institutional contexts. Second, we want to show the empirical relevance of this last point by testing the extent to which the quality of institutions (here proxied by the governance indicators of Kaufmann et al. (2007)) can affect the quality of the workforce (proxied by the percentage of the working age population registered in a lifelong learning program). Our empirical analysis is conducted on a data‐set of 11 European countries observed over the period 1996–2006. The results indicate that countries with better governance indicators are also endowed with a more qualified workforce.

When should households be compensated for land-use restrictions? A decision-making framework for Chinese forest policy

Competing uses of land mean that regulations aimed at environmental conservation often conflict with the land-use rights of rural households. Several reports suggest that this has occurred with the introduction of the Natural Forest Protection Programme (NFPP) in China, one of the world's largest logging ban programmes. This paper investigates whether households should be compensated for infringements on property rights, drawing on institutional economics literature on regulation. We distinguish between cases where regulation solves local collective action problems and increases the welfare of those affected, and those where regulation involves a redistribution of rights from one group to another. We apply this to the NFPP by estimating the net welfare impacts, using household level stated preference data with econometric techniques that explicitly account for zero and negative values of the dependent variable. We find that the ban on logging does not affect the net welfare of the affected forest communities. This indicates that the losses resulting from the restrictions on property rights are offset by the benefits from restrictions on other local households. We also find evidence that a partial reduction in logging would be welfare increasing, indicating that the NFPP is to some extent addressing local collective action problems in forest areas. Broader implications for the question of compensating for infringement of property rights as the result of regulatory interventions in contexts of institutional imperfections are also drawn.

Sustainability, poverty and municipal services: the case of Cape Town, South Africa

AbstractAlthough many global policies refer to the need to reconcile growth, equity and sustainability, there is little that demonstrates what this entails, especially in fast growing developing countries. The sustainable cities literature focuses on environmental constraints, and the institutional economics literature on governance. The aim of this paper is to provide a conceptual synthesis that makes it possible to understand the complex dynamics of technological and institutional innovation. The evolution of Cape Town's strategies to deal with post‐apartheid inequalities within a context of severe resource constraints is reviewed. Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment.

The Political Economy of Financial Services Reform in India: Explaining Variations in Political Opposition and Barriers to Entry

This article offers an explanation for disparities in the speed and level of political opposition to reform of the financial services sector in India. Focusing on the disparity of outcomes in reform of the insurance and the banking sector, the author suggests why some barriers to entry were present in India during the reform process. The author extends this argument to explain differing levels of political opposition to reform in the banking and insurance sectors. To provide empirical support for this theoretical construct, the author uses measures of market segmentation and market concentration to show how specific forms of state ownership helped promote divergent types of political opposition that built in India during the decision-making stage of reform and during the implementation of second-generation reforms. The experience of financial services reform in India offers important lessons for the new institutional economics literature on early transition elsewhere.

Near Exogeneity and Weak Identification in Generalized Empirical Likelihood Estimators: Fixed and Many Moment Asymptotics

This paper analyzes near exogeneity and weak identification in Generalized Empirical Likelihood Estimators. Near exogeneity and weak identification are related to the exogeneity and relevance of the instruments, respectively. These two issues are important from an applied perspective, such as empirical growth theory and labor economics. In the case of empirical growth and institutional economics literature a small number of moments/instruments are used in studies. First, we analyze the limit behavior of estimators and tests under fixed number of weak moments and near exogeneity. We show that Anderson-Rubin (1949) and Kleibergen (2002) type of tests' limits change when there is small correlation between the instruments and the structural equation error. The new limits are obtained under the null hypothesis at the true vale of the parameter. The test statistics are no longer asymptotically pivotal in the joint case of near exogeneity and weak instruments compared to the weak identification case. We also show that when used with the x2 critical values, which are not valid in the case of near exogeneity and weak instruments, the tests show very large size distortions. This is an important warning to applied researchers who may use these tests without taking into account the near exogeneity problem. We try subsampling and delete-d jackknife methods to recover asymptotic limits. Both of these methods are inconsistent. However, we show that the asymptotic limit of delete-d jackknife is arbitrarily close to true limit and only slightly liberal. In simulations, exponential tilting based tests with delete-d jackknife method have good size compared to the others. Then we develop the limits of estimators and tests under many weak moments with near exogeneity. The results are different from the fixed moments case. Estimators are consistent, and test limits are simple, noncentral x2.

Institutions matter, but which ones?

AbstractThe purpose of this paper is to go beyond the narrow focus of the current institutional economics literature in development on the institutions protecting individual property rights, and to look at the economic effects of some other aspects of institutional quality on the development process (like democratic participation rights and institutions to address coordination failures). Another purpose is to suggest an alternative instrumental variable in quantifying the effects of property rights institutions. Finally, we speculate how, on account of distributive conflicts, institutions that have an adverse effect on economic performance often tend to persist for long periods of time in many poor countries.

PROPOSALS FOR STRENGTHENING THE SARB'S INFLATION TARGETING REGIME

This paper proposes a set of criteria for efficient institutions derived form the New Institutional Economics literature and the IMF's Code of Good Practices on Transparency in Monetary and Financial Policie. These criteria are used to evaluate the institutional framework of South Africa's inflation targeting regime. A test for measuring the comprehensiveness of South Africa's inflation targeting regime is used to verify the results of the institutional evaluation. Finally, a matrix of proposed institutional reforms is constructed to address weaknesses identified by the institutional evaluation.

Trade policies and development of less-favoured areas: evidence from the literature

The links between international markets and production and consumption decisions in less-favoured areas (LFAs) often appear rather loose. Hence, it may be questioned whether international trade and economic growth effects trickle down to LFAs. This paper explores the evidence in the literature in which direction and to what extent trade policy may effect the development of LFAs. The literature on modern trade and growth theory spell out conditions of sustained economic growth that are, nearly by definition, opposite to the conditions that hold for LFAs. Although the institutional economics literature is very much focused at the country level, it is clear that for LFAs with inadequate institutions and infrastructure, the effects of trade-led growth is often irrelevant. Further trade liberalisation will entail small or even detrimental effects for LFAs, with an exception for products suffering from tariff escalation and/or peak tariffs. The prevailing problem seems to be the lacking supply response to (international) price changes. The literature contains evidence that long-term growth strategies for less-favoured areas require the development of institutions and infrastructure.

When both states and markets fail: asymmetric information and the role of NGOs in African health care

In African health care the “miracle of the market” has not occurred. Patients exhibit willingness to pay for quality health care and yet good private practitioners are unable to sell their services. Simultaneously nongovernmental organizations (NGOs) are running successful health facilities for which patients are willing to pay. We use a model of the demand for health care in the presence of asymmetric information that allows us to view African health care in the framework of the New Institutional Economics literature. We validate this view empirically and show that NGOs have the institutional capacity to deliver high quality health care. We show that at the same time, neither private practitioners nor regular government organizations charging fees will easily succeed.

The Role of Institutions in the Development of Vietnam

The process of comprehensive economic reforms that commenced in 1986 has several lessons to offer for future policy-making in Vietnam. This article argues that institutional strengthening is critical for the future prosperity of the country. Several propositions from the New Institutional Economics (NIE) literature are corroborated by recent evidence from Vietnam to recommend policy settings necessary for continued economic development. The recommendations include the establishment of well-defined property rights, including a clear and enforceable system of contracts; strengthening the planning and administrative capacity of provincial offices; and, improvements in law enforcement. These institutional reforms must be given the highest priority if growth is to be revived and sustained over the medium to long term.

The Organizational Impact of Technological Change: A Comparative Theory of National Institutional Factors

The organizational literature documents the upheaval that incumbent firms, across numerous industries, often experience when they confront technological change. Much of this work is based on evidence drawn from US firms. A separate literature drawn from institutional economics shows that technologies evolve differently in different countries. This may imply that incumbent and entrant firms in different countries may differ in their response to technological change. In fact, emerging comparative empirical studies of technical change in individual industries suggest that the effect of technical change upon incumbent firms is not always the same in different countries, even within the same industry. In particular, technological shifts that displace US incumbent firms in an industry often do not displace incumbent firms in Japan in the same industry. Explaining these comparative differences requires linking the institutional economics literature to the organizational literature on innovation. In particular, the ability of startup firms to exploit the opportunities of technological change accounts, in part, for the displacement of incumbent firms. Their ability in turn depends on the institutional environment, which influences the organizational constraints that incumbents and startups face in attracting people, capital, and customers. This paper offers a parsimonious theory of national institutional factors that promote or inhibit the formation of startup firms in the US and Japan. Three factors are proposed: the technical labor market, the venture capital market, and the structure of buyer-supplier ties. Complementarities between these factors cause them to work as a system, while their differences elevate or reduce the level of incentive constraints and appropriability constraints acting on incumbent and startup firms respectively. As a result, incumbents might be displaced in an industry in one country, while incumbent firms in the same industry in another country might persevere, due to the presence or absence of startup firms. This suggests that there may be no single best way to organize for innovation in different institutional settings; rather, firms must seek to exploit the virtues of their environment, even as they act to mitigate the hazards it poses.

Asymmetric Information and the Role of NGOs in African Health Care

In African health care the "miracle of the market" has not occurred. Patients exhibit willingness to pay for health care and yet practitioners are unable to sell their services. Simultaneously non-governmental organizations (NGOs) are running successful health facilities for which patients are willing to pay. We develop a model of the demand for health care in the presence of asymmetric information that allows us to view African health care in the framework of the New Institutional Economics literature. We use previously published empirical results to support the validity of this view and show that NGOs have the institutional capacity to deliver high quality health care, whereas private practitioners, even with good intentions, will not easily succeed. Having arrived at the well documented conclusion that NGOs provide high quality services through theory allows us to draw policy conclusions on ways to extend the provision of health services.

The Law and Bioeconomics of Ethnic Cooperation and Conflict in Plural Societies of Southeast Asia: a Theory of Chinese Merchant Success

Overseas Chinese dominate merchant roles in the economies of Southeast Asia. Chinese merchant success has generated envy and hatred by indigenous populations, resulting in episodes of racial violence toward the Chinese. In order to understand the economic basis of inter-ethnic conflict and violence, it is necessary to understand the economic basis of success of Chinese merchants in Southeast Asia. The paper presents an economic theory of Chinese middleman success. Central to the theory is the idea that the Confucian code of ethics which emphasize the importance of mutual aid/reciprocity among kinsmen, fellow-villagers and those speaking the same dialect, enabled the Chinese to cooperate among members of their own dialect group to form a club-like ethnically homogeneous middleman group (EHMG) for the provision of infrastructure, essential for middleman entrepreneurship. Chinese merchants embedded in the EHMG were able to economize on transaction costs, and this gave them a differential advantage to out-compete other ethnic groups to appropriate merchant roles. The EHMG functions also as a 'cultural transmission unit' transmitting Confucian ethics to future generations of Chinese middlemen, hence maintaining Chinese merchant roles over time. The paper draws on some key concepts in the New Institutional Economics literature as well as modern evolutionary biology.

A Strategic Deconstruction of John R. Commons’s Regulatory Discourse

(1997). A Strategic Deconstruction of John R. Commons’s Regulatory Discourse. Journal of Economic Issues: Vol. 31, No. 1, pp. 1-28.

Determinants of Organisational Size: Bhp and Vertical Integration 1885–1915

AbstbactOne of the most important strategic issues for managers involves deciding the size of the organisation. Factors which influence this decision include economic, social and political change. The boundaries of the organisation are thus not fixed, and are in part contingent upon the particular characteristics of the environmental context. Theoretical progress in the discipline of strategic management, as far as it relates to matters of organisational size (and structure), requires that serious consideration be given to the analysis of the dynamics of vertical integration which is available in the New Institutional Economics literature. One of the most interesting strands in this literature is the Transactions Costs Economics developed by R.H. Coase and O.E. Williamson. This paper provides an overview of the Coase-Williamson theory of vertical integration. It then uses this theory as a point of departure in conducting an empirical discussion of decisions to integrate vertically taken by one of the world's largest mining enterprises, The Broken Hill Proprietary Company Limited, during the first 30 years of its existence. The paper seeks to demonstrate that theorising in strategic management is enriched if analytical (albeit critical) attention is paid to advances in the economics of organisation.

Determinants of Organisational Size: Bhp and Vertical Integration 1885–1915

AbstbactOne of the most important strategic issues for managers involves deciding the size of the organisation. Factors which influence this decision include economic, social and political change. The boundaries of the organisation are thus not fixed, and are in part contingent upon the particular characteristics of the environmental context. Theoretical progress in the discipline of strategic management, as far as it relates to matters of organisational size (and structure), requires that serious consideration be given to the analysis of the dynamics of vertical integration which is available in the New Institutional Economics literature. One of the most interesting strands in this literature is the Transactions Costs Economics developed by R.H. Coase and O.E. Williamson. This paper provides an overview of the Coase-Williamson theory of vertical integration. It then uses this theory as a point of departure in conducting an empirical discussion of decisions to integrate vertically taken by one of the world's largest mining enterprises, The Broken Hill Proprietary Company Limited, during the first 30 years of its existence. The paper seeks to demonstrate that theorising in strategic management is enriched if analytical (albeit critical) attention is paid to advances in the economics of organisation.

Governance, economy, and foreign aid

Much of the current donor discussion of governance takes place outside of a historical or theoretical context. This article locates the governance issue within recent political science, development management, and institutional economics literature. The review focuses on accountability, participation, transparency, and predictability or the rule of law, and includes a discussion of the impact of these variables upon economic performance. It concludes that donors can best assist good governance to develop by helping to foster conditions under which developing societies can push their governments to deliver the accountability, transparency and rule of law that sustainable development requires.

The Road to Functional Flexibility: White Collar Work and Employment Relations in a Privatised Public Utility

This paper is concerned with the changing nature of office work in one region of a privatised public utility, which will be referred to as National Utility (NU). It describes how clerical work at NU, traditionally characterised by a detailed division of labour and functional specialism, is being transformed by the introduction of on-line processing and multi-functional team-working. At the same time, NU management is seeking to change the nature and pattern of clerical employment. The intention is to increase the ratio of part time to full time staff, to increase the ‘personal accountability’ of staff, and to move towards a performance-based, rather than a seniority-based, pay and promotion structure. These changes are of some broader theoretical significance. As Batstone et al. (1987) note, much industrial sociology literature has focused on job content as the primary determinant of a number of features of work and employment, including worker autonomy, supervisory styles, and management control strategies. Indeed, much recent industrial sociology, management and institutional economics literature has tended to link employment patterns and conditions, as a whole, with job content, in a direct and unproblematic fashion. In particular, it is often assumed that in order to secure multiple skills, high quality work and the innovative capacities of labour, employers will have to offer not only better pay, but also a better package of conditions, job security, fringe benefits and training and promotion opportunities. Developments at National Utility suggest that the link between job content and employment relations may be weaker than has sometimes been implied, and cast doubt on the theoretical basis for ‘post-Fordist’ confidence in the emergence of a new deal for labour as a result of flexible methods of work organisation.

Sociological Research on Service Sector Small Businesses: Some Conceptual Considerations

Recently 'small business revivalism', and the 'enterprise culture' more gener ally, has been articulated through a range of political discourses as a panacea for the economic and social ills of the British economy. This is sometimes linked — often in an implied causality — with official data showing self-employment and small business ownership increasing throughout the 1980s (Bechhofer and Elliott 1985; Creigh et al. 1986; Spilsbury et al. 1986; Curran and Burrows 1988; Hakim 1988). In turn, the rhetoric of 'enterprise' has become a central motif of everyday life as represented through the media and popular discourse. These political, economic and cultural developments have been mirrored by an increasing academic interest (Curran 1986). Indeed, in debates concerned with the current economic restructuring of Britain focused around the concept of 'flexibility' (Poliert 1988) small businesses have been analytically highlighted to an extent hitherto unheard of. As Poliert (1988) has demonstrated, the notion of flexibility has manifested itself in two distinct strands of the literature, which, although they come to opposing conclusions, both give small business a high profile. The first derives from the managerialist flexible firm literature (Atkinson 1984) which tends to see small businesses and the self-employed as dependent, often in subcontracting roles, and largely providing work for the peripheral workforce. In this strand the small firm and the self-employed are crucial to the numerical flexibility required increasingly for the 'Japanized' production systems allegedly developing in Britain (Dickens 1988: 38-89). The second strand derives from an institutional economics literature which claims to have located the beginnings of a 'second industrial divide' in capitalist societies. This involves the decline of Fordist mass production and the rise of a post Fordist system of 'flexible specialisation'. This new 'technological paradigm' involves large numbers of small, craft-based firms using technologically advanced methods operating within a network of similar small firms, but also