Economie Néo-Institutionnelle(Economie des Contrats, des Organisations et

des Institutions)

Eric BROUSSEAU

University of Paris X

Institut Universitaire de France

Eric@brousseau.info

Www.brousseau.info

2Foundations

• Contract :Agreementss under which two parties makereciprocal commitments terms of their behavior

• Paradox :

– central in the understanding of decentralized social systems(XVIII° c.) , but only recent inclusion in economics (1970’s)

• Dissatisfactions with the walrasian model

– Theoretical boundaries : Key features to represent a decentralizedeconomy:

• Unrealism : agents exchange out-of-equilibrium in a bilateral context

• Logically Inconsistent : Institutions do not organize exchanges

• Paradoxical : Market exchange is costly

– Empirical boundaries : Tools to regulate a “market economy”

• Antitrust and the efficiency of inter-firm agreements

• Can public utilities be efficiently regulated ?

• The paradoxical macro-properties of decentralized economies (NKE)

3

Foundations (Ctnd.)

• Theoretical roots:

– Economics of information (Arrow, Akerlof)

– Boundaries of the firm (Coase, Williamson)

– Carnegie behaviorist school (Cyert, March, Simon)

– Property rights economics (Alchian, Demsetz, Furubotn,Pejovich)

– Law, administrative sciences, etc.

• Why is it a success : a powerful tool

– Difficulties associated with the economics of coordination

– Economics of various provisions for coordination

– Endogeneization of the design of rules and decision-makingmechanisms

– Evolution of contractual mechanisms

– Economics of alternative coordination mechanisms : institutions,organizations

4

Three Theoretical Frameworks

Theory Rationality Contracting

parties’

Information

External Institutions Principal Issue

WT Savage Complete and

Symmetric

Perfect (precluding deviations

from the announced plans)

Centralized and simultaneous

establishment of all equilibrium

prices and traded quantities

IT Savage Complete and

Asymmetric

Perfect (guaranteeing the

performance of commitments)

Disclosure and incentives ensured by

payment scheme

ICT Savage Complete and

Symmetric

Imperfect (unable to verify

some variables)

Allocation of decision rights and

residual surplus to motivate non-

contractible investment

TCT Simon Incomplete and

Asymmetric

Very imperfect (unable to

verify some variables and

subject to bounded rationality)

Creation of a procedure for decision

making ex post and of a mechanism

to render the commitment

enforceable

5

Les Théories Economiques des Organisations

Théorie Managériale de

la Firme

Théorie Behavioriste I

Théorie Behavioriste

II(+ NEI pour eco de la Cohérence

Interne)

Cohérence,

Socialisation

(Objectifs Collectifs

Théorie Evolutionniste

Competence BV(+ NEI pour eco des relations internes)

Théorie des Equipes

(Marshak, Radner)

Prise de Décision

(Objectif Collectif)

Relation Externe

Comportement

Stratégique

Fonctionnement

Interne

6

Incentive Theory

• Two agents & Incomplete information

– The (un-informed) Principal solves the problem raised

by its relationship with the (informed) agent

– Two key assumptions:

• P knows the probability distribution of the variables and A’s

preference structures

• Institutional framework ensure enforcement (given

verifiability)

• Two canonical frameworks

– Adverse selection : exogenous variable

– Moral Hazard : endogenous variable

7

A Menu of Contracts to solve Adverse Selection

qqq211

* *q

t

t *2

t1*

t2

t1

Perfect Information : First Best Solution (q*, t*)

Imperfect Info : Second Best Solution (q, t)

8

An incentive scheme to solve Moral Hazard

The Incentive/Insurance Dilemma

Signal

e.g. Sales

Perfect Incentives

Perfect Insurance

Second Rank Incentives

Payment

e.g. Wage

9

Contractual Incompleteness

• Two Possible Causes

– Ex ante costs (writing costs)

– Ex post costs (enforcement costs)

• Judge’s inability to verify the relevant state of nature

• Incapacity of parties to prevent renegotiations

• ICT’s Assumptions: Perfectly Rational Agents:

– Ex ante costs => Logically Inconsistent

– Ex post costs => Boundedly Rational Judges

• TCE’ Assumptions: Boundedly Rational Agents

– Ex ante costs => Boundedly Rational Contractors

– Ex post costs => Enforcement Devices designed and run by Boundedly Rational Agents

10

Le Timing du modèle de Grossman & Hart [1986]

Date 0

Contratinitial

Date 1

Investissementsi i i

A V= ( , )

Période ex ante

Phase d'échange

Date 3Date 2

Réalisation de l'état denature !

Périodeex post

11

Incomplete Contract Theory:

The Unverifiability Framework

PaymentPhase

Date 5Date 3

Ex ante Period

Date 0

InitialContract

Date 1

InvestmentsRenegotiation

Phase

Date 2

Realization of theState of Nature

Ex interim Period

Date 4

DeliveryPhase

Ex post Period

The Timing in Hart and Moore [1988]’s model

•Problem and solution

•Ex-post hold-up vs. Ex-ante commitment when uncontractability arises

•Default Clause & Renegotiation Mechanism

•Two families

•Hart & Moore : Unsophisticated Default Option : Sub-optimal level of Investment

•Aghion, Dewatripont, Rey : Sophisticated DO : Optimal level of Investment

•Two Interpretations

•Capabilities and behavior of the enforcement institutions

•Responsiveness to monetary incentives (e.g. wealth constraints)

12

1. Economie Neo-Institutionnelle: Histoire,

Concepts, Méthodologie, Courants

• Histoire: La lente émergence de la théoriede la gouvernance

• Des hypothèses comportementales à lathéorie du choix des formes de gouvernance

• Méthodologie: L’analyse comparative desformes de gouvernance

• Courants: Structures de Gouvernance etCadre Institutionnel

13

1.1. Histoire: La lente émergence de la

théorie de la gouvernance

Williamson

• Stade pré-formel: l’atmosphère de “Market and Hierarchies” [1975]

• Stade semi-formel: les dimensions des attributs de la transaction “The

Economic Institutions” [1985]

• Stade formel: les dimensions des structures de gouvernance dans “Comparative

Economic Organization” [1991]

• Stade complet: l'Environnement Institutionnel dans “Hierachies, Markets and

Power in the Economy” [1995]

North

• L’analyse évolutionnaire du cadre institutionnel de “Institutions, Institutional

Change and Economic Performance” [1990]

14

1.2. Des hypothèses comportementales à la

théorie du choix des formes de gouvernance

• Des Hypothèses Comportementales à la

notion de Gouvernance

• Marché, Hiérarchie, Forme Hybride

• Coûts de Production et de Transaction

15

NIE: a theory for the analysis of Governance of

Inter-individual Coordination

Bounded RationalityRadical Uncertainty

Incomplete Contract Inefficiency & Hold-up

Authority (Non-marginal) Incentives

& Coercion Mechanism

Supervision

Mechanism

Arbitration

Mechanism

Governance Structure

Opportunism

Ensuring EnforcementDriving Behaviors

BehavioralAssumptions

Coordination

Problems

GovernanceFunctions

Governance

Mechanisms

Non-IntentionalOpportunism: Quasi-rent

Sharing

ReinforcedUnverifiability

Intentional Opportunism:Adverse -Selection &

Moral Hazard

16

1.2.2. Marché, Hiérarchie, Forme Hybride

• 3 Formes de Gouvernance

– Marché (Concurrence + Institutions Générales)

– Hiérarchie (Subordination + Reglement Privé)

– Forme Hybride (Négociation)(MacNeil [1974])

• 3 Caractéristiques des Transactions

– Spécificité des Actifs

– Fréquence

– Incertitude

17

1.2.2. Marché, Hiérarchie, Forme Hybride

Marché Hybride Hyérarchie

k

CG

k1 k2k’

18

1.2.3. Coûts de Production et de Transaction

!CG

!CP

!CG + !CP

k *k’

!CG = CGH - CGM

!CP = CPH - CPM

C

k0

19

1.3. Méthodologie: L’analyse comparative des

formes de gouvernance

• Une Position Pragmatique

– Théorie Ciblée & Position Popperienne

• Conséquences du Réalisme des Hypothèses

– Un modèle de choix discrets

– Critères de choix, critères d’efficacité

– Sélection et apprentissage

• Positif et Normatif

• Des limites: Apprentissage et évolutions

20

TCE: The economics of self-enforcement

• An “empirical success story”…

– Long term commitment: Flexibility and Credibility

– The economics of mixed mechanisms : e.g. franchising

• Licensors’ recontracting capabilities : control of franchisee

• Rent sharing : franchisor’s incentives

…but econometrics needs to be developed (simultaneous equation,

structural models)

• And its application to the regulation of contracts

– No contractual provisions systematically leads to negative effects,

but CPs’ impact is context dependent

– => Freedom of contracting + Anti-trust supervision

… but a theory of rationality and a theory of selection are missing

21

NIE and the endogeneization of Institutions

Private Institutions

(or Collective Governance

Structures)

Public Institutions

Interindividual

Governance Structure

EconomicAgent

EconomicAgent

•From the economics of contracts to the economics of multi-level Governance•Collectivization of Governance : from contract to collective governance mechanism

•Property rights: from exogenous (Barzel, North) to endogenous (Libecap)

•From Embeddedness to Communities’ self-regulations

•And its consequences for the design of institutions•“Deregulation”: Optimal regulation=>Yardstick Competitions=>Independent Regulator

=>Adaptation of the Reg Framework to Political specificities

•“Co-regulation” and new regulatory frames in the Global context

22

1.4. Courants: Structures de Gouvernance et

Cadre Institutionnel

Structure de Gouvernance

Environnement Institutionnel

Individus

Caractéristiques

Comportementales

Paramètres

InstitutionnelsPressions à

l'Adaptation

Canalisation des

Comportements

Evolutions

ComportementalesApprentissage

23

Quatre

Niveaux

d’Analyse

Complé-

mentaires

24

The Transaction Cost Approach to Institutions

25

Property Rights As A General Concept

"!Settlement of rules that delineate and allocate theright to use economic resources to agents interactingin a common economic space".

= Property rights system + Contract law +Competitive law + Principle to allocate and usecommon resources

4 major activities:

– Rules Setting

– !Enforcement

– Conflict Settlement

– Commanding agents when rules do not apply

26

The Transactional Approach to Property

Rights

Measuring

Stating unambiguously before everyone which resources an agent has exclusive uses rights over

– Delimiting rights of use (scope of IPRs)

– Allocating them to agents (Identifying IPOs)

EnforcingOperationalizing these exclusive uses rights by excluding every unentitled agent from access

– “Usus”:

• unauthorized uses detection

• exclusion enforcement

– “Abusus”

• authorization management

– “Fructus”

• control of the actual uses

• fee collection

27

Centralized vs. Decentralized PRs Settlement

• Scale, Scope & LearningEffects

• Increased consistency (Reducedlevel of conflicts)

• Collective WelfareMaximization (in case ofexternalities)

• Mal-adaptation

• Distortions in theallocation of means

The Decentralization Tradeoff

The Centralization Tradeoff

• Fine Matching withAgents’ Preferences

• “Optimal” level ofprotection

• Innovation Ability

• Costs of Measurementand Enforcement

• High level of conflict

• Private Capture of Non-Rival Goods

28

Two Main Line of Analysis

• The Dynamics of Institutional Frames (North)

– The Historic Raise of Market Economies and the

Underdevelopment Problem

• The Economics of Private Institutions and Self-

Enforcement (Greif, Weingast)

– Governmental vs. Self-Regulation and the Optimal level

of de/centralization

"Institutional Design

Institutions and Organizations in

New-Institutional Economics:

Is a Contractual Theory of

Organizations Consistent ?

30

Paradoxes

• Starting Point for NIE :

to integrate Organizations in Economics(Coase [1937], Alchian & Demsetz [1972], Williamson [1975, 1985], etc.)

• Criticisms to the “contractual” approach to Organizations

– Internal : Ménard, Aoki, Simon (?)

– External : Evolutionary Economics, Resource Based View

Do we benefit from a NIE approach to organizations ?

– NIE is a Theory of !Contracts and Institutions

– NIE allows to think Organizations but we need an analysis of the

“raison d"’être” of Organizations

31

Contracts and Institutions in NIE

• Institutions :Human built set of constraints —Spontaneous emergence or

Voluntary designed— that bounds and channels individualbehaviors

– Rules + Decisions making processes (Institutional Organizations)

• Contracts:Mutual commitments organizing individual interactions

– Rules + Mechanisms to make collective decisions (Authority)

Common Features:

– Governance Mechanism

– Resources for inter-individual coordination

32

What is an Organization ?

• Frontiers - Voluntary Membership - Exclusiveness

• Voluntary and Explicit Coordination of Actions

• Specific Goals

– Objective # $ Individual Objectives

# leader’s Objective

33

Is an Organization an Institutions ?

• Organization : What stylized facts ?

– Voluntary and Explicit Coordination of Collective

Actions(Labor division and Hierarchy)

– Unicity of Decision (Hierarchy and Exclusiveness of

Membership)

– Persistence of Characteristics and of Performances

(Building of Collective Resources & Control of

Appropriation)

• The limits of the Transaction as a Unit of Analysis

– Economics of Governance Principles # Economics of

Governance Structures (Principle + Networks)

– Collective Entity

34

What is missing for a theory of organizations

Foundations Mode de

Cohesion

Raison d'être

Institutions Management of

Political Power

& Repeated

Interactions

Lower costs &

Collective

Constraints

(Ostracism)

Support for Inter-

individual

Coordination

Organizations Voluntary and

Exclusive

Joining to a

Collective

Venture

(Management of

Exit)

Collective

Governance :

• Coordination

• Surplus

Sharing

• Appropriation

of collective

resources

Collective use of

resources &

Genesis of

collective

resources

(Delay and Risk to cover

investments, Transaction costs and

complexity, Knowledge

indivisibilities)

Theories of the Firm

36

Introduction

• The alternative theories of the firm are different, sometimesconcurrent and sometimes complementary because

– 1) they try to explain the same classes of phenomenon but

– 2) they focus on different points

• The Theories of the firm try to explain:

– The «nature and boundaries of the firm»

• On what basis is it possible to explain the existence and the sizeof firms?

• Why some transactions are internalized, others externalized,others internalized & externalized

– The internal structure of the firm

• How is the firm organized?

– The relations between firms and market

• For example what about the so-called «hybrid forms»?

37

The Nature of the Firm: 70 Years After

• Coase:Bounded Rationality, Uncertainty, InstitutionalEnvironment

– Vs Alchian & Demsetz (1972)

• Incentives

– Transaction costs (asset specificity) (Williamson, 1979)

– Rent seeking (Klein, Crawford, Alchian, 1978)

– Property Rights (Grossman & Hart, 1986, Hart & Moore, 1990)

– Incentives (Hölmstrom & Milgrom, 1994)

• Information and Knowledge

– Dispersion of information and of knowledge (Jensen & Meckling,1992, Garicano, 2000)

– Competence, Knowledge and Resource-based view (Langlois &Foss, 1997, Kogut & Zander, 1996)

38

Transaction costs(Williamson, 1979)

• Asset Specificity

– What kind of structure of governance depending on the objective

as well as subjective factors that imply transaction costs?:

• Improvements:

– Empirical results

– Human asset specificity

– Hybrid forms (Ménard, 2002)

• Drawbacks

– The problem of bounded rationality (Gigerenzer, 1996)

(Rubinstein, 1998)

– How is it possible to explain the evolution of the specificity of the

assets?

39

Property Rights(Grossman & Hart, 1986, Hart & Moore, 1990)

• Origin: Rent seeking (Klein, Crawford, Alchian, 1978)How is it possible to avoid the appropriation of the Quasi-Rentswhen investments are non-contractible?

– Empirical Results (Masten, 1984, Joskow, 1987)

• Incentives in Investing in Non-Contractible Assets and Efforts

– How the definition of property rights permits to solve the problem of theincompleteness of contracts?

• Improvements:

– The renegotiation

– The hierarchy (Hart & Moore, 1999)

– The problem linked to the difficulty to define property rights on some kind of assets

– The measurement Cost Based Theory of the Firm (Barzel, 2001)

• Drawbacks– How is it possible to analyze delegation if property rights cannot protect the ownership

of assets? (Rajan & Zingales, 2001)

40

The Incentives Approach

• The Internal Structure of Decision Making

– In a Principal Agent relationship, with asymmetries ofinformation how is it possible to define an « optimal system ofincentives »?

• 1. Improvements:

– Multi P – Multi A

– Multi T

– When incentives are conceived as a system

• Drawbacks

– Bénabou & Tirole (2002)

• Intrinsic motivations and incentives (crowding out vs crowding in, thelooking-glass self…)

– The problem of altruism, fairness, reciprocity etc… (Frey &Schmidt, 2000)

• A Programmatic Synthesis: Holmström (1999)

41

Dispersion of information and of knowledge(Jensen & Meckling, 1992, Garicano, 2000)

• Market for Knowledge Failures

– If Hayek(1945) is right, how the difference betweenspecific and general knowledge constraints theorganizational structure of the firm?

• Improvements:

– Matching and hierarchy (Garicano & Rossi, 2002)

– Dispersion of knowledge and leadership (Witt, 1998)

• Drawbacks

– Are information and knowledge the same thing?

– How is it possible to combine the dispersion (and thegrowth) of knowledge and the definition of incentives?(Garicano & Rossi, 2002 but Bénabou &Tirole, 2002)

42

Competence and Resource-based view(Langlois & Foss, 1997, Kogut & Zander, 1996)

• Firms as the sole way to accumulate knowledge

– The existence and boundaries of the firm as explainedby the constitution and evolution of « a stock ofknowledge more or less embedded in equipments »

• Improvements:

– Mainly empirical results

– An « Austrian » theory of the firm (Dulbecco & Garrouste, 1999)

• Drawbacks

– How exactly are the competences emerging andevolving?

– What kind of incentives are compatible with theiremergence and evolution?

43

Conclusion

• The Theories of the Firm as theoretical « success

stories »

• The research agenda:

– Looking more precisely at the problem of rationality

– Analyzing the relations between knowledge and

incentives

– Comparing those « success stories » empirically