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| Constraints placed by law and social norms on human behavior. Can be formal & informal |
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| Costed associated with simple transaction costs, such as buying or selling merchandise, borrowing money or investing in business. |
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| Constraints on human behavior whether hey be formal or informal. Institutions generally affect & shape social behavior of individuals. Institutions help with markets (i.e. Buying & Selling) |
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| Confined in writing and are generally more precise than unwritten rules. (Ie laws that are enforced, speeding) |
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| Underneath Formal institutions: Set of rules that define the power of the major political bodies and players (i.e. CEO, CFO etc) and how they are selected. Determine the difference between political regimes, such as democracies and democracies |
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| Underneath Formal institutions: Non political institutions codified by laws. Differ between economies and can alter how the economy runs overall. |
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| Under Legal Institutions what are the three ways in which the institution can be rooted? Give examples if applicable. |
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Religion: Some legal institutions are deeply rooted through religious. (Ie islamic culture & Chinese culture both follow customs that are deeply rooted in old religious ideas)
The Common Law System: Developed in England and other Anglo Saxon countries (Canada, Australia, New Zealand). Heavily passed on saxon laws. Legal arguments in the common law system rely heavily on legal precedents, and decisions made in past court cases.
Civil Law Systems: Rely mostly on recorded legal statuses and have developed from roman civil law. Decisions made under civil law system is based off on consistency or lack of consistency. |
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| Those that are not legally codified, they are based on social norms( or conventions) accepted and expected standards of behavior. |
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| What are informal institutions based on? |
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| Informal institutions are based on a countries culture, the set of beliefs and values passed down from generation to generation. |
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| Interactions between Institutions |
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First: Laws generally evolve with with culture and social norms.
second: It is very difficult to establish formal laws or formal institutions if they do not correlate with the already existing informal institutions.
Third: Formal Institutions often strengthen the effects of informal institutions.
Informal & Formal institutions complement one another |
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| Efficient institutional solutions provide crucial reductions in transaction costs and contribute to economic development. |
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| Between institutions on communicating. |
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| One party knows more about the quality of product compared to the other. |
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| A situation caused by informational asymmetries in which reputable lenders and sellers leave the market to disreputable players. |
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| Possibility of unobservable actions one the contracting parties can take that will hurt the interest of the other contracting party. |
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| What are Institutional solutions to information problems? |
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Disclosure rules, legal solutions to informational problems disclose information of the transaction to the other party.
Regulation of Access or Entry: rules that govern entry into and the profession, and required candidate to earn a qualified diploma or pass an exam as a means to screen out unqualified people. (doctors have regulations to pass before they can practice medicine) |
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| Economic term that means taking certain action to provide other parties in a transaction with creditable information. |
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| Informal solutions to informational problems |
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| Relational Contracting, entering contracts through networking of personal contacts. |
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| business partnership requires an investment from one of the parties that is specific to the transaction in question. One partner is forced to "hold up" the other in renegotiate the deal. |
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| Solutions to the hold up problem |
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Institutional Solutions: Legally enforceable contracts But can still not be a full solution because there is usually a lack of detail to solidify these written agreements.
Informal Solutions: Vertical Integration, a situation in which two firms working together as supplier and client merge into a single firm. |
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| When one party reneges on the prior commitments made to another party in the course of joint transactions |
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| Consequences to lack of commitment |
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| Solutions to commitment problem |
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institutional: Contacts help
Informal: Witnes may help |
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| Problem in which parties follow their own self interest and do not consider the overall benefit for other parties they are working with |
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| Prisoner A Vs B: They will act in the benefit of themselves. No communication prior to interrogation. |
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Agents can all coronate on a specific action and the action an individual chooses depends on what others do
Multiple Equilibria: different possible sets of actions on which individuals coordinate |
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| Theory of Autocracy ( Roving & Stationary Bandits) |
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Understanding the characteristics of an autocracy through the examples of a roving & stationary bandit.
Roving Bandits: represent a dictator or leader that is anticipating to be in power for a short period of time ( i.e. there is only two periods and he is controlling for only one of them) due to the quick turn over rate, the roving bandit is less likely to invest in the economy and will plunder all that he can within that first year.
A stationary bandit does the exact opposite. He believes that he will be in power for a while ( two periods) thus he will not plunder everything in the first period and will leave some capital ignorer for the economy to continue to grow until the next period. He will take a portion from each period.
The discount rate comes into play with this; meaning the value placed on tomorrows dollar. if its high they are always going to be a stationary bandit |
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| Candidates are likely to support policies that the median voter will advocate for (Thus referred to the Medium Voter Theorem) because they want the overall votes of the population. The candidates are unlikely to deviate from the middle because they will lose the election. |
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| ensures most voters’ interests are considered, but competition forces candidates to propose a mix of policies appealing across voters. |
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| Secularization Hypothesis |
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| As country become richer, the influence of religion in society should decline |
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| Whereby the oldest son inherits the business *or landO of his father, was soon seen to be economically advantageous even though highly unequal |
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| The the catholic church prohibiting Charging interest on a loan |
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| the presence of a network of diverse voluntary associations and the success of democratic institutions |
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| culture emphasizes individual achievement (standing out) and awards social status to success in individual achievement, be it economic, artistic, scientific, humanitarian. Individualistic enforces through a legal system in which can promote greater economic development. |
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| emphasizes conformity and embeddedness in larger groups and frowns on deviation from conformity. This form of culture limits growth because it runs primary on factors of peer pressure. This is possible to maintain in small community, but limits the ability to branch out and grow economy. |
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| Properties of Land Contracts |
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| There are 5 properties of land contracts in which have their positives and negative incentives. The 5 Lond contracts are; private ownership, Sharecropping, Communal ownership, rental contracts, and wage labor contracts |
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| The farmer owns his own land and is likely to invest because he will see the returns. The highest risk because he has unlimited liability if his land does not produce |
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| A percent of crops must be given to landowner during each harvest depending on the amount the famed has produced. If he produces a lot he gives a lot, and vice versa. The sharecropper is unlikely to invest in the farm (optimal is lower) because he has to give away a percent anyway |
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| Africa** Community as a whole takes part in land. This acts as a great insurance, but people are less likely to invest because they probably will not keep the benefits of the investment |
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| Work less and not as hard unless you are directly supervised |
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| Giving a fixed amount each month regardless of revenue made. Risk is higher but optimal input is usually high as well because you need to make a profit so you must put in the time and effort |
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| The primary method to improve land productivity, leaving the field idle during growing season to let the soil retain nutrients and moisture for future crops |
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| The redistribution of land from large landholders to small farms |
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| In countries where there were no revolutions or large shifts in power, obstacles to land reform have been quite formidable |
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| Property Rights and the Informal Sector |
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| Property rights to informal holdings cannot be be secured legally. This lack of title decreases the security of property rights ti business or real estate holding in which results to many transaction costs that have a negative economic impact. |
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| The high transaction costs in the informal sector |
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There are nine principal types of transaction costs associated with informal sector
1) Without legal property rights an individual cannot use property as collateral, therefore they cannot invest more into their land. US does this in which can increase productivity.
2)Many of the basic services like; sewage telephone water and electricity cannot be offered without legal titles
3)The absence of legal title makes it difficult to trade assets because of asymmetric information, buyers of non titled dwellings cannot go to court if they feel as if they were cheated, therefore most buyers are wary of purchasing unregistered property.
4) Property owners cannot obtain insurance contracts in the informal sector, whether for a business or residence. The absence of legal title thus strongly reduces the ability to minimize risk. People without legal title to dwellings or their business are usually poorer, they would benefit most from access to insurance
5) Lack of legal title makes it difficult to attract other owners to bring additional capital. Investors will go to a formal sector instead.
6) Informal sector makes people vulnerable to predatory behavior of bureaucrats and officials that can be bribed. Tax bribes and other unfair policies can be implemented.
7) Cannot use courts to enforce contracts with clients or other business partners. Property disputes also cannot be made.
8)Informal business also cannot openly advertise. Limiting advantage to expand their business scope
9) Because they meed to operate beneath governments radar they will operate several small concealed workshops rather than a large factory which would be vulnerable to official inspections and blackmail. Transactions are slow |
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| sector of economic activity that is not registered, not subject to laws of registered companies or not subject to taxation |
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| The transfer of firm ownership from state sector to the private sector. Privatization policies aim at increasing the share of the economy that is based on private property rights |
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Enhance efficiency of state owned.
Maximization of government revenue. The transfer of state assets to private sector should provide government sufficient fiscal revenues. |
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| Methods of Privatization in Developing Countries & Resulting problems |
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Method 1: Public Offerings; when shares of the firm are floated (sold) on the stock market. This is rarely used in developing countries where stock markets are nearly nonexistent.
Problem of Method 1: Public offerings require sufficient legal protection for minority shareholders, who would place their savings in risky shares without protection from scandals.
Method 2: Direct Sales of firms by the government to interested parties. Simple but problematic
Problems: The sale price is likely to be to low because the gov has no idea what he public is willing to pay. The buyer will suggest a price lower than they would actually be willing to pay.
Another problem, government does not know if a prospective buyer is the most qualified to run the firm and whether there may be more competent buyers.
Method 3; Auctionin, which encourages multiple buyers to attend. A potential qualified buyer will always likely bid up
Problem:Potential buyers may not be able to compete due to lack of funds
sometimes buyers engage in collusion instead of competing with each other.
Method 4: Giveaway assets
This is risky because they may not be the most competent but dispersing shares to the general public does not encourage strong block holder ownership |
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