Institutional & Behavioral Economics
Professor A. Allan Schmid.
Fall Semester, 2000 (AEC-EC-RD 810)
http://msu.edu/user/schmid/instecon.htm
email schmid@msu.edu
phone (517) 355-2266
Texts:
1. Schmid, Property, Power and Public Choice, Praeger, 1987, second edition.(Referred to
as PPPC and available on the web.)
2. D. North, Institutions, Institutional Change. Cambridge, 1990.
3. A. Hirschman, Exit, Voice and Loyalty. Harvard, 1970.
4. A. Schmid, Study Notes, available on the web.
5. A. Schmid, Institutional & Behavioral Economics, draft. (I&BE) Available at Budget
Printing.
I. Introduction to institutional economics
1. The Big Picture Aug. 28
Framework for analysis of connection between choice-coordinating institutions and the
performance of the economy. Alternatives range from the market with alternative property and
contract rules to government enterprise and commands. Role of formal and informal institutions.
2. Property as Power and as Economizing Aug. 30
Institutions as constraints and as enabling. How paradigms affect what you see, what you
question.
 Schmid, I&BE, Ch. 1, "Introduction to Institutional and Behavioral Theory," (2000).
 Eggertsson, Thrainn, Economic Behavior and Institutions. (1990), Ch. 1.
 Rutherford, Malcolm, Institutions In Economics, (1994), Ch.1.
3. Power, Cost, and Political Economy Sept. 6
 Samuels, Warren, "The Legal-Economic Nexus," George Washington Law Review,
6:1556-1578 (1989).
 Samuels and Schmid, "The Concept of Cost in Economics," in Samuels, Medema and
Schmid, eds., The Economy As A Process of Valuation, (1997).
 Bartlett, Randall, Economics and Power, (1989), Ch. 1., 28-30, 41-47. (Optional)
4. Domain of Institutional Analysis Sept. 11
 Hodgson, Geoffrey, "The Approach of Institutional Economics," Journal of Economic
Literature, March, 1998, pp. 166-192.
 Schmid, I&BE, Ch3, "Institutions and Organizations," Sections 1 & 2 only.
 Simon, Herbert, "The Failures of Armchair Economics," Challenge, Nov.-Dec. 1986, pp.
18-25. (Optional for fun.)
II. Institutional economics theory
Variables and relationships identified by theory. How do characteristics of goods and people
affect human interdependence and the possibility of Alpha's choices to affect Beta? How do
alternative rights shape the distribution of the consequences of this interdependence?
5. Behavioral Concepts: Learning, Reinforcement and the Environment Sept. 13
 Schmid, I&BE, Ch. 2, "Behavioral Economics."
 Margolis, Howard, Patterns, Thinking and Cognition, (1987) excerpts. (Optional for fun.)
 Gazzaniga, Michael, The Social Brain, (1985) pp. 67-80. (Optional for fun.)
6. Cognition and Choice Sept. 18
 Elster, Jon. "Emotions and Economic Theory," J. Of Economic Literature, March, 1998,
pp. 47-74.
 Earl, Peter, The Economic Imagination, (1983) Ch. 4 "Alternative Behavioral Theories of
Choice," pp. 87-88 only, on lexicographic choice.
 Allais Paradox example (to be distributed).
7. Behavioral Economics Sept. 20
 Arrow, Kenneth, "Rationality of Self and Others in an Economic System," in Hogarth
and Reder, eds., Rational Choice (1987).
 Simon, H. "Rationality in Psychology and Economics," in Hogarth and Reder, eds.
Rational Choice (1987).
 Sen, A. "Rational Fools: A Critique of the Behavioral Foundations of Economic Theory,"
Ch. 4. in his Choice, Welfare and Measurement, (1982).
8. Incompatible Use and Exclusion Cost Sept. 25
 Schmid, PPPC, Ch. 3, "Incompatible Use and Exclusion Costs."
 Olson, Mancur, The Logic of Collective Action, (1965) Ch. 1.
 Hirschman, A. O., Getting Ahead Collectively, (1984) pp. 42-49. (Optional for fun.)
 Dawes, Robyn, et.al. "Cooperation for the Benefit of Us--Not Me or My Conscience," in
J. Mansbridge, ed. Beyond Self Interest, (1990). (Optional for fun.)
9. Behavior that Depends on Behavior of Others Sept. 27
 Schelling, T., Micromotives and Macrobehavior. (1978), Chs.1, 2, and 7.
10. Prisoner's Dilemma Oct. 2
 Schmid, PPPC, Ch. 8, pp. 172-9, "Social Traps".
 Goetz, Charles, Law and Economics, Ch. 1, "Analyzing Human Choice Under
Alternative Rules," pp. 1-37 only (Prisoner's Dilemma and Chicken Games).
 Review of Axelrod, The Evolution of Cooperation, and Frank, Passions Within Reason,
Harvard Bus. Review, May-June, 1989 pp. 29-34.
 Platt, J. "Social Traps," American Psychologist, August, 1973, pp. 641-651. (Optional for
fun.
11. Increasing Returns Oct. 4
 Schmid, PPPC, Ch. 4, "Economies of Scale."
 Arthur, Brian, "Positive Feedbacks in the Economy," Scientific American, Feb. 1990, 9299.
 Skott, Peter, "Cumulative Causation," in Elgar Companion to Institutional and
Evolutionary Economics, G. Hodgson, ed. 1994, pp. 119-22
12. Joint-Impact Goods (Marginal cost = zero) Oct. 9
 Schmid, PPPC, Ch. 5, "Joint-Impact Goods."
13. Transaction Costs Oct. 11
 Schmid, PPPC, Ch. 6, "Transaction Costs."
 Williamson, O. "Transaction Cost Economics" in Handbook of Industrial Organization,
Schmalensee & Willig, eds., 1989.
14. Uncertainty Oct. 16
 Heiner, R. "Origin of Predictable Behavior" Amer. Economic. Rev, Sept. 1983.
 Littlechild, S. "Three Types of Market Process," Economics As A Process, Langlois, ed.
(1989).
15. Organizations Oct. 18
 Simon, H. "Organizations and Markets," J. Econ. Perspectives, 5:25-44 (1991).
 Hodgson, G. "Evolutionary & Competence-Based Theories of the Firm," Evolution and
Institutions, (1999), 247-275.
 Schmid, I&BE, Ch. 3, "Institutions and Organizations," Section 3 only.
16. Institutional Change (1) Oct. 23
 Samuels, Schmid and Shaffer, "An Evolutionary Approach to Law and Economics," pp.
96-99, in R. England, ed. Evolutionary Concepts in Contemporary Economics, (1994).
 Schmid, I&BE, Ch 5, "Institutional Change Analysis."
17. Institutional Change (2) Oct. 25
 North, D. Institutions, Institutional Change and Economic Performance, (1990)
18. Paradigm Restated Exam Oct. 30
 Schmid, PPPC, Ch. 7, "Conclusions," pp. 138-9 only.
 "Forty Concepts:" and "Paradigm Comparisons" (on the web)
 "SSP Impact Methodology" journal file. (on the web)
 A good review vehicle is Ch. 2 in Samuels and Schmid, eds. Law and Economics.
(optional)
III.
What is the best institutions?
19. Exit, Voice, or Loyalty Nov. 1
 Hirschman, Albert, Exit, Voice and Loyalty, (1970) pp. 1-126.
20. Normative Rules for Choice Among Alternative Institutions Nov. 6
 Schmid, PPPC. Ch. 11, "Rules for Choice."
 Bromley, D. "Rethinking Markets," Amer. J. of Agr. Econ., 79(5):1383-1393 (1997)
 Calabresi, Guido, Ideals, Beliefs, Attitudes and the Law, (1985) pp. 1-2, Ch. 3, "The
Beliefs of a Reasonable Person," and p. 69 and pp. 84-85.
 Breimyer, Harold, "Government 'Intervention': A Deceptive Label," Choices, 2nd Quarter
1991, p. 3. (Optional for fun.)
21. "Is There a Better 'ole To Go To"? Nov. 8
 Robinson, Joan, Economic Philosophy, Ch. VI, "What Are the Rules of the Game,"
pp.124-147.



Singer, Joseph, "Legal Realism Now," California Law Review, (1988) 76:465-544.
(Excerpt)
Bromley, Dan, (1989) Economic Interests and Institutions, Ch. 1 & pp. 77-79 & 143-46.
Schmid, I&BE, Ch. 3, "Institutions and Organizations," Section 5, "Social Choice."
(Optional)
IV.
Can we predict the consequences (performance) of alternative institutions? Growth
and Distribution
22. Experimental Economics Nov. 13
 Smith, Vernon, "Theory, Experiment and Economics," J. of Econ. Perspectives 3(1):15169 (1989).
 Ledyard, J. "Public Goods: A Survey of Experimental Research," in J. Kagel & A. Roth,
Handbook of Experimental Economics, Ch. 2, (1995).
 Davis and Holt, Experimental Economics (1993), pp. 21-22. (Optional)
23. Case Studies Nov. 15
 Ostrom, Elinor, Larry Schroeder and Susan Wynne. Institutional Incentives and
Sustainable Development, (1993) pp. 35-6, 43-4, 56-57, 68-70, 87-88; & 177-181, 20910, and pp. 225-29.
 Fukuyama, F. Trust, Part II: Low Trust Societies & the Paradox of Family Values, Ch. 8
(China). (1995).
 Grief, Avner. "Institutions and Commitment in International Trade: Lessons from the
Commercial Revolution," American Economic Rev. 82:(May)128-133 (1992).
24. Econometric Studies Nov. 20
 Schmid, PPPC, Ch. 12.
# Note assignment. Also, Term Paper outline due.
25. Market Institutions: Law and Economics Nov. 22
 DeSoto, Hernando, The Other Path, Ch. 5, "The Costs and Importance of the Law," esp.
pp. 158-187.
 Schmid and Robison, "Applications of Social Capital Theory," J. Agr. and Applied Econ.
 27(1):59-66 (1995).
 Pencavel, John, and Ben Craig, "The Empirical Performance of Orthodox Models of the
Firm: Conventional Firms and Worker Cooperatives," unpublished paper, May, 1993.
 or Olson, Mancur, "Why Some Nations are Rich, and Others Poor," J. Econ.
Perspectives, Spring 1996.
26. Labor Institutions Nov. 27
 Thurow, Lester, Dangerous Currents (1983), Ch. 7, "The Labor Market".
 Williamson, Oliver, Economic Institutions of Capitalism, Ch. 9, "The Organization of
Work."
 Bergmann, Barbara, (1989) "Does the Market for Women's Labor Need Fixing?" J. of
Econ. Perspectives, 3 (Winter):43-60.
27. Technology Institutions Nov. 29
 Ruttan, Vernon, and Yujiro Hayami, "Toward a Theory of Induced Institutional
Innovation" Journal of Development Studies, pp. 203-23 (1984).


Schmid, "Biotechnology, Plant Variety Protection, and Changing Property Institutions in
Agriculture," North Central J. of Agr. Econ. 7:129-38 (1987).
Dosi, Giovanni, and Luigi Orsenigo, "Coordination and Transformation," In Dosi, et.al.
eds., Technical Change and Economic Theory, 1988, pp. 13-37.
28. Political Institutions: Constitutional Economics Dec. 4
 Schmid, PPPC, Ch. 12, pp. 277-283 and conclusions, pp. 288-291.
 Sandmo, A.,"Buchanan On Political Economy," J. of Econ. Literature, 28(1):50-65,
March, 1990.
V. Can we create new institutional alternatives?
30. Can the Timid Get There From Here? Dec. 6
 Schmid, Allan, "Broadening Capital Ownership: The Credit System as a Locus of
Power," in Alperovitz and Skurski, eds., American Economic Policy, (1984).
31. Final Exam Period, Thursday, 7:45 a.m. Dec. 14
Oral Presentation of Term Papers to Class. Distribute Summaries of Abstract.