Syllabus
for INSTITUTIONAL ECONOMICS
Lecturer: Marina.I. Odintsova
Class teacher: Marina I. Odintsova
Course description
The course in “Institutional Economics” is taught to the fourth year undergraduate
students and is designed to last one semester. The course is delivered in the form of
lectures.
A course in “Institutional economics” accomplishes a series of courses that
constitute the basic training for economists. In this course students study the impact of
institutions on the incentives of economic agents and, as a result, on the wealth of the
society. The course also gives an economic explanation to institutions of the economy.
Neoinstitutional economic theory states that institutions have an impact on the efficiency
of resource allocation and on the welfare of all members of the society under the
assumption of positive transaction costs. Institutional structure of the economy
determines the incentives of the participants of economic activity, the range of their
possibilities and the transaction costs they bear.
The course in institutional economics introduces the main categories that
describe the institutional structure of society and help to understand that institutions
matter both in theory and in practice.
Prerequisites
Before studying institutional economics students should master not only the
fundamentals of general economic theory but have knowledge of historical courses and
humanities as well. Students are supposed to be competent in basic economic analysis up to
the level of the Introductory Microeconomics and Microeconomics-2 and be familiar with
the basics of the game theory.
Teaching Objectives
 to provide an overview of recent developments in the field of institutional economics;

to introduce the basic concepts and techniques related to the subject;

to show the students how the institutional structure of economy determines the
incentives of economic agents;
 to help the students in their understanding of the role of institutional environment in
economic theory and in business practice.
Assessment
The following forms of control are used to determine the final grade:
1
 written home assignments (5);
 essay (6-8 pgs);
 test (80 min.),
 written exam (120 min) at the end of the fall semester
Grade Determination
The final grade is determined by

average grade for home assignments (10%),

test grade (20%),

essay (10%),

presentation (20%),

written exam grade (40%).
Main Reading
Odintsova M.I. Institutional economics. Textbook. Moscow: Urait, 2014 (rus.)
Additional Reading:
Books
1. Eggertson Thr. Institutions and Economic Behavior. Cambridge, Cambridge
University Press, 1990.
2. Furubotn E., Richter R. Institutions and Economic Theory. Ann Arbor. The
University of Michigan Press. 1997.
3. Нart O. Firms, Contracts and Financial Structure. Oxford, Clarendon Press, 1995.
4. Milgrom P., Roberts J. Economics, Organization and Management. – PrenticeHall Int., 1992.
5. North D. Institutions, Institutional Change and Economic Performance.
Cambridge University Press, 1990.
6. Williamson O. The Economic Institutions of Capitalism. The Free Press, N.Y.
1985
Papers
On introduction to institutional economics
1. Eggertson Thr. Neoinstitutional Economics. // Newman P. The New Palgrave
Dictionary of Economics and the Law. Macmillan Reference, 1998, Vol. 2, pp.
665-670.
2. Ellickson R. The Aim of Order without Law. //Journal of Institutional and
Theoretical Economics, 1994, Vol. 150, pp. 97-100.
3. Posner, R. Social Norms and the Law: an Economic Approach. // The American
Economic Review, Vol. 87, 1997, pp. 365-369.
4. Posner R., Rasmusen E. Creating and Enforcing Norms, with Special Reference to
Sanctions. //International Review of Law and Economics, 1999, Vol. 19, pp. 369382.
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5. Young P. H. The Economics of Convention. // Journal of Economic Perspectives,
1996, Vol. 10, pp.105 -122.
On transaction costs
1. Allen D. Theoretical Difficulties with Transaction Costs Measurement.//Division
of Labour and Transaction Costs. 2006. Vol.2. N.1. P. 1-14.
2. Barzel Y. Measurement Cost and the Organization of Markets.// Journal of Law and
Economics, 1982, Vol. 25, N. 1, 27-48.
3. Dixit A. Governance Institutions and Economic Activity.// American Economic
Review, 2009, Vol.99, N. 1. P. 5-24.
4. Greif A., Milgrom P., Weingast B.R. Coordination, Commitment and Enforcement:
The Case of the Merchant Guild.// Journal of Political Economy, 1994. Vol. 102, N.
4 ,pp. 745-776.
5. Greif A. Cultural Beliefs and the Organization of Society: A Historical and
Theoretical Reflection on Collectivist and Individualist Societies. //Journal of
Political Economy, 1994. Vol. 102, N. 5, pp. 912- 950.
6. Кronman, A. Contract Law and the State of Nature. // Journal of Law,
Economics and Organization, Vol. 1, N. 1, 1985, pp. 5-32.
7. Niehans J. Transaction Costs.//The Palgrave Dictionary of Economics. L.,
Macmillan, 1987, p.676-679.
8. North D. Integrating Institutional Change and Technical Change in Economic
History. A Transaction Cost Approach. // Journal of Institutional and Theoretical
Economics, 1994. Vol.150, pp. 609-624.
On property rights theory
1. Allen D. The Rhino’s Horn: Incomplete Property Rights and the Optimal Value of
an Asset.// Journal of Legal Studies, 2002, Vol.31, N.3, P. 339-358.
2. Demsetz, H. Toward the Theory of Property Rights.// American Economic Review.
1967, Vol. 57, pp. 349-359.
3. Dahlman C. The Problem of Externality. Journal of Law and Economics, 1979
Vol. 22. P. 141-162.
4. Holderness C. The Assignment of Rights, Entry Effects, and the Allocationof
Resources.// Journal of Legal Studies, 1989, Vol.18, N. 2, P. 181-189.
5. Libecap G. Common Property. /Newman P. The New Palgrave Dictionary of
Economics and the Law. Vol. 1, pp. 317-324.
6. Olson M. Collective action. / The New Palgrave: A Dictionary of Economics. L.,
Macmillan, 1987, P. 474-477.
7. Tullock G. Rent-seeking. /The New Palgrave: A Dictionary of Economics.
L., Macmillan, 1987, P. 147–149.
On contracts
1. Akerlof G. The Market for Lemons: Quality Uncertainty and the Market
Mechanism. //Quarterly Journal of Economics, 1970, Vol. 89, P. 488-500.
3
2. James Jr.Н. S. The Trust Paradox: A Survey of Economic Inquiries into the
Nature of Trust and Trustworthiness. // Journal of Economic Behavior and
Organization. 2002.Vol. 47. P. 291-307.
3. Joskow P. Contract Duration and Relationship-Specific Investments: Empirical
Evidence from Coal Markets. American Economic Review. 1987, Vol. 77, P.168
-173.
4. Klein P. The Make-or-Buy Decisions: Lessons from Empirical Studies. //
Handbook of Institutional Economics/ Ed/. Shirley M., Menard R. Springer, 2005.
Pp.435-464
5. Klein B., Crawford R., Alchian A. Vertical Integration, Appropriable Rents and
the Competitive Contracting Process. //Journal of Law and Economics, 1978, Vol.
21, pp. 297-326.
6. Menard C. Inside The Black Box: The Variety of Hierarchical Forms.
/Transaction Cost Economics and Beyond. ed. Groenewegen J. L., Kluwer
Academic Publishers, p.149-170.
7. Miller G. Solutions to Principal-Agent Problems in Firms./ Menar C., Shirley M.
Handbook of New Institutional Economics. Springer. 2005. P. 349-370.
8. Shelanski H., Klein P. Empirical Research in Transaction Cost Economics: A
Review and Assessment. //Journal of Law, Economics and Organization, 1995,
Vol. 11, N. 2., P.335-361.
9. Williamson O. Comparative Economic Organization: The Analysis of Discrete
Structural Alternatives. //Administrative Science Quarterly. 1991, Vol. 36, N. 2,
P.269-296.
On institutional theories of the firm
1. Alchian A., Demsetz H.
Production, Information Сosts and Economic
Organization.// American Economic Review, 1972, Vol. 62, P. 777-795.
2. Coase R. The Nature of the Firm. // Economica, 1937 , Vol. 4. P. 386-405.
3. Fama E., Jensen M. Agency Problems and Residual Claims.// Journal of Law and
Economics, 1983,Vol. 26, P. 327-349.
4. Hart O. An Economist’s Perspective on the Theory of the Firm. Columbia Law
Review, 1989, Vol.89. P. 1754 -1774.
5. Schleifer A., Vishny A. Survey of Corporate Governance. // Journal of Finance,
1997, Vol. 52. P. 737.
On economic theory of the state
1. McGuire M., J Olson M. The Economics of Autocracy and Majority Rule: The
Invisible Hand and the Rule of Force. //Journal of Economic Literature, 1996,
Vol. 34 March, P.72-96.
2. North, D. Government and the Cost of Exchange in History. // The Journal of
Economic History, vol. 44, No. 2, 1984, pp. 255-264.
On institutional change
1. Bromley D. Institutional Change and Economic Efficiency. // Journal of
Economic Issues, Vol. 23, No. 3, September 1989.
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2. David P. Clio and the Economics of QWERTY. // American
Economic
Review.1985. Vol 75, P. 332-337.
3. Margolis S., Liebowitz S. Path Dependence. / Newman P. The New Palgrave
Dictionary of Economics and the Law. Vol. 3, P.17-22.
4. Roe M. Chaos and Evolution in Law and Economics. //Harvard Law Review,
1996, Vol. 109, P. 641- 658.
Internet resources
Current course materials are posted in the ICEF information system http://mief.hse.ru
Encyclopedia of Law and Economics. http://allserv.rug.ac.be./~gdegeest/
Institutional Society for New Institutional Economics ISNIE http://www.isnie.org
Libertarium Library http://www.libertarium.ru/library
Course outline
1.Introduction to institutional economics
The concept of an institution: attempts at definition. Institutions and organizations.
Functions of social institutions.
Interaction situations and the types of norms: prisoners’ dilemma-type situation; coordination situation; inequality situation. Enforcement characteristics.
Institutional structure of the society. Formal and informal institutions. Sanctions for
disobeying norms (self-enforcing sanctions, guilt, shame, informational sanctions,
bilateral costly sanctions, multilateral costly sanctions). Conditions of
norms’
effectiveness.
Interaction of formal and informal institutions. The limits of imitations of institutions
from best-performing countries. The problems of their enforceability.
The new institutional economics and modern institutionalism. Old institutionalism.
(O Ch.1; E Ch1; N Chs 5,6,7; F&R Ch. 1)
2. Transaction costs
The concept of transaction. Market and intrafirm transactions. Transaction costs as
friction in the economy. Two main theoretical approaches to transaction costs.
Transaction costs and transformation costs. Interdependency between transaction costs
and transformation costs.
Types of market transaction costs and means of transaction costs minimization.
Search and information costs.
Measurement costs. Seach goods, experience goods and credence goods. Excessive
measurement. Productive and distributive information. Business practices as means of
economizing on measurement costs (warranties, share contracts, brand name).
Overseaching and suppression of information - “pig in a poke”.
Bargaining costs. Cooperative surplus and different ways to divide it. Hobbes
bargaining as a social dilemma. Battle of sexes, Stackelberg strategy and reputation of the
leader. Credible threats. Bargaining costs and types of contracts.
5
Supervision and contract enforcement costs. “State of the nature”, trust game and
contract enforcement. Hostage, collateral, self-enforcing agreement and emotional union
as private means of bilateral contract enforcement. Reputation as a contract enforcement
device. Bilateral and multilateral reputation. Shortcomings of the reputation as a contract
enforcement mechanism. Reputation, information and the “free rider problem”.
Reputational mechanism supported by organisations. Comparative advantages and
shortcomings of the legal enforcement mechanism. Contract enforcement mechanisms as
second-best solutions.
Transaction costs of protection against the encroachment of third parties.
Transaction costs, the main types of economic exchange and their supporting
institutional structures. Coexistence of the main types of economic exchange in the
modern society.
Transaction cost measurement. Transaction costs in the Russian economy.
(O Ch 2; E Ch 7; N Ch 8; M&R Chs 2,5,8; F&R Ch 2; W Ch 2)
3. Property rights theory
The definition of property rights. Property rights in different legal traditions (common
law and civil law traditions).
The property rights approach: some basic concepts. Specification of property rights,
the bundle of rights, partitioning of property rights, attenuation of property rights.
Assigning property rights: the internalization of externalities. The Coase Theorem.
Critic of Coase (dynamic effects of alternative legal rules, wealth effect, distributional
effects, strategic behavior and the problem of holding-out, endowment effect,
sociological critic, unrealistic assumption about zero transaction costs)
Alternative property rights regimes. Common property (open access) and the tragedy
of the commons. Exclusive property rights and the conditions for their emergence.
Trasaction costs of property rights specification. Communal property. Optimal group
size. The First economic revolution. Private property. Public property.
The emergence of property rights. The optimistic theory of the emergence of property
rights (naive model). The interest-group theory of property rights. The costs of collective
action. The theory of rent-seeking.
(O ch 3; E Chs 2,4,8,9; F&R Ch 3; M&R Ch 9)
4. Contracts
The definition of a contract. Legal and economic approach to contracts.
Bounded rationality and contractual incompleteness.
Asymmetric information (hidden characteristics, hidden information/ hidden action,
hidden intentions) and opportunistic behavior.
Adverse selection and the closing of markets. Signalling, screening and self-selection.
Asset plasticity and moral hazard. Principal-agent problem and agency costs.
Controlling and preventing moral hazard (controlling the agent, incentive contracts,
bonding, do-it-yourself). Case study: crisis of the savings and loan associations in
America as an example of moral hazard in financial markets.
6
Attributes of transactions and the choice of a contract. Asset specificity, types of
specific assets. Synergy effects, quasi-rents appropriation and hold-up problem.
Classification of contracts (classical, neoclassical and relational contracting). Discrete
alternative governance structures: market, hybrids and hierarchy. Hybrids: specific assets
and their safeguards.
Institutional environment and the role it plays in the choice of contract. The role of
trust. Economic approach to trust. Types of trust ( contractual trust, competence trust
and goodwill trust).
Explaining the internal structure of formal organizations: transaction costs approach.
(O Ch 4; E Ch 6; M&R Chs 5,6,8,9,16; F&R Ch 4; W Chs 1,2,3)
5. Institutional theories of the firm
Neoclassical theory of the firm. Explanations of the firm in the new institutional
theory (F.Knight, R. Coase, Simon H., A. Alchian and H. Demsetz, O.Williamson,
O.Hart).
The market and the firm. Comparative analyses of the alternative coordination forms.
Internal market and influence costs. The boundaries of the firm.
Ownership structure of the firm. A theory of the owner-monitor (Alchian and
Demsetz, 1972).
Competing forms of economic organization, relative advantages of alternative
structures (proprietorships, partnerships, open corporation, regulated firms, public
enterprises, nonprofit organizations, labor-managed firms).
Separation of ownership and control in the open corporation. Opportunistic behavior
of managers and corporate control. Outsider and insider corporate governance.
Privatization in Russia and other transition economies and corporate governance.
(О, Ch.5; E Chs. 5,6; М&R Chs 9,15,16; F&R Ch. 8; Hart, Chs 1-4)
6. Economic theory of the state
Social mechanisms for constraining open access. Contractual theories of the state
(Locke, Rousseau), Hobbes predatory theory of the state. North’s model of the state.
The regulatory role of the state in the Russian economy.
(О Ch. 6; E. Ch.10)
7. Institutional Change
Stability of institutions and institutional change. The concept of institutional
equilibrium. The main sources of institutional change. Centralized and spontaneous
institutional change. The role of the state in the process of institutional change. The
problem of the compensation of disadvantaged groups.
Selection of efficient institutions in the process of competition ( Alchian, Friedman).
Institutional change and path dependence. Forms of path-dependence (weak form, semistrong and strong forms).
(О Ch 7; N. Chs 9-14)
7
Distribution of hours by topics and types of work
№
Topic
1.
Introduction to institutional
economics
14
4
2
6
2.
3.
4.
5.
Transaction costs
Property rights theory
Contracts
Institutional theories of the
firm
Economic theory of the state
Institutional change
Total:
24
28
26
20
6
6
6
6
6
6
6
4
16
16
14
10
8
8
128
2
2
32
2
2
28
4
4
68
6.
7.
Total
hours
Lectures
Seminars
Self-study
8