An extensive overview of all the concepts you have to study for the course Institutional Economics. You can use this as a checklist as preparation for the exam. The concepts are extensively described.
Utility: Refers to the pleasure or satisfaction people feel when consuming a good.
Exchanges: Uitwisselingen
Institutions: Any rules that we build as humans that is going to structure our behavior
and social interaction. That we behave in certain ways. If we don’t have institutions,
markets won’t work. Because we have market failures, markets are not efficient by
themselves, so we need institutions to make them efficient. We need rules to make
exchanges. (The euro makes exchanges within the EU easier because you talk in the
same language of currency.)
Formal Institutions: What is specified. Everything about contracts, laws and many
types of organizations are considered as institutions outside of the market, like schools
and firms.
Informal institutions: It’s about habits, values and different cultures and the impact
that it has on firms or individuals, like gender cultural differences. They have impact on
the economy (not working on the weekends).
Lecture 2 – From old to new IE
Old institutional economics: Evolutionary institutionalism. Originated because the
neoclassical economic models were way too static and universal, and the reality is that
economics is dynamic. We need to understand the historical evolution of institutions and
systems of economic exchanges. The whole is greater than the sum of its parts.
Dual direction in IE: Institutions are results from human actions. Once they are
instituted, they influence human action in return.
Economics: (1) Formal view: Is the logic of rational action and decision-making, as
rational choice between the alternatives uses of limited (scarce) resources. (2)
Substantive view (inhoudelijk): an instituted process of interaction between man and its
natural and social environment. Much broader definition.
Forms of exchanges: (1) redistribution: group of people is producing for a central
entity. This entity is going to redistribute to individuals (A B, A C, A D).
(2) reciprocity (wederkerig, wisselwerking): allocation of goods is based on reciprocal
exchanges between different entities. Every individual is equal, and somebody is going
to give a service or good and the other gives something else to another person. This is
not done for profit. (A B, B C, C A). (3) householding: Smaller scale and about
the family directly. (A A). (4) market exchange: This is what we had before about the
market. (A B).
New institutional economics (NIE): Agrees with OIE, but also believe that institutions
matter and that it is necessary to advance from the OIE. It is concerned about
exchanges in markets and opportunism of individuals (opportunistic behavior). NIE is
like a mix between Neoclassical and IOE. NIE is really about the formal definition of
economics (so about the scarcity). Goal of NIE is trying to understand how we can
make markets more efficient in terms of total welfare.
Game Theory: Is the center of this discipline. Game theory is the study of independent
decision making. We must take into account the way other people behave. Individuals
making decision when their optimal choise depends on the choice others have chosen.
, The main game in this game is the prisoner dilemma. In this game you see how the
choice of another affects yourself. They must make the decision simultaneously and
know that the other one gets the same deal. It will always be a sub-optimal outcome
because they behave rational.
Nash-equilibrium: Sub-optimal outcome because they behave rational. Has not the
highest welfare.
Pareto optimality: No individual can be better off without making others worse. This is
neoclassical approach, because it is about the total welfare of the society of a whole.
Entities could improve their outcomes by a contract or by cooperating. In neoclassical
economics it is about the invisible hand (=mechanism of which beneficial social and
economic outcomes may arise from the accumulated self-interested actions of
individuals) that lead to pareto optimality outcome. NIE says that it is not naturally
leading to a pareto optimal outcome and cooperation may be much more efficient than
only to let it flow. This is the difference between neoclassical game theory and NIE
game theory. Game theory is an example to cooperate or compete with other countries
to maximize the welfare of the country.
Lecture 3 – Diversity of costs deriving from economic exchanges
Types of goods: (1) Individual (private) goods: high rivalry consumption, high
excludable from consumption (because of high prices). When you buy a house, it won’t
be available anymore for another person. Food, clothing, car. (2) collective (public)
goods: low excludability and low in rivalry. You cannot make it difficult for others to
consume it. It will still be available for others. Defense, dykes, legal protection. (3)
common pool resources: high rivalry consumption, low excludability. It is complicated to
exclude people from things coming from the nature. Water is accessible for all people
almost. Water, energy, nature, environment. (4) club goods: you must pay a
membership to have access to it. Low rivalry (all members have the access to the same
goods) and high excludability. Swimming pools, cinemas, telephone network.
Theory of firm: Exchanging different goods will have different types of costs who arise
from exchanging different goods. Is about transaction, organizational, social,
externalities costs, costs of risk and cost of trust. Contracts are always incomplete.
Externalities: When an activity positively or negatively impacts another party that is not
involved.
Social costs: Costs imposed on the consumers because of being exposed to the
transaction for which they are not compensated or charged. It’s the sum of private costs
and externality costs.
Free riding: Taking advantage of a good without paying for it. Common good. Example
is some behavior of opportunism. This is market failure. (Tragedy of the commons =
seas are not owned by one entity, anyone is allowed to fish = common pool resource,
each fisher will fish as many as they can, but this is not sustainable in time.
Transaction costs: Costs arising from using the economic system, from all economic
exchange. Is increased over the last time due to population, production increase,
globalization. (1) search and information costs: identifying different trading opportunities,
outlets and partners. (2) bargaining costs: negotiating acceptable trading agreements.
(3). Policing and enforcement cots: monitoring trade conditions and enforce contractual
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