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Economie desInstitutions et du

PolitiqueEric BROUSSEAU

University of Paris XInstitut Universitaire de France

eric@brousseau.infowww.brousseau.info

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Une brève histoire de la théorie économique• Adam Smith (1776)

– Séparation de l’économique et du politique– Développement du concept de marché

• Léon Walras (1874)– Théorie du marché– Kenneth Arrow, Gérard Debreu (1953) Théorie de l’équilibre

général⇒ Insatisfaction vis à vis de la théorie du Marché:

⇒ Théorie des contrats: 1970’s⇒ Théorie des institutions: 1990’s

• Adam Bergson (1938) [+ Ingénieurs Economistes]– Fonction de bien-être social (SWF)– Kenneth Arrow (1953): Théorème d’impossibilité⇒ Mécanismes d’agrégation des préférence

⇒ Théorie du vote et Paradoxe de Down⇒ Théorie des choix publics

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3L’émergence de l’approche contractuelle

• 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)

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De l’approche contractuelle aux institutions• Why is it a success : a powerful tool

– Difficulties associated with the economics ofcoordination

– Economics of various provisions for coordination– Endogeneization of the design of rules and decision-

making mechanisms– Evolution of contractual mechanisms– Economics of alternative coordination mechanisms :

institutions, organizations

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La Théorie des Choix Publics• 2 contributions centrales

– Buchanan (1949) l’Etat comme marché (plutôt que personne)– Olson (1965) L’action collective fruit des conflits entre groupe

d’intérêt => rent seeking• 3 conséquences

– Etat comme arrangement contractuel (Buchanan & Tullock,Calculus of Consent 1962, Hayek):

=> Contrat Constitutionnel– Fonctionnement de l’Etat comme compromis entre exécutif,

législatif et bureaucratie (Niskanen)=> Articulation entre pouvoirs & Relations citoyens/élus

– Norme de comportement étatique (d’objectif collectif): l’arbitrageefficacité/équité (Buchanan, Rawls, Sen)=> Intervention et redistribution justifiées

6Plan• Présentation générale

• Les institutions dans la nouvelle économie institutionnelle

• Emergences et Evolutions des Cadres Institutionnels

• Ordre Public / Ordre Privé

• L’économie politique constitutionnelle

• Fédéralisme

• Bureaucratie

• Décision par vote et analyse du fonctionnement des systèmesdémocratiques

• Concevoir et Réformer les Systèmes Institutionnels

• Concurrence entre droits et analyse de l’efficacité comparée descadres institutionnels

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I: Les institutions dans la nouvelle économieinstitutionnelle

• La NEI• L’approche de la Gouvernance par Williamson• L’approche des Institutions par North• Une synthèse

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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

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Des hypothèses comportementales à la théoriedu choix des formes de gouvernance

• Des Hypothèses Comportementales à lanotion de Gouvernance

• Marché, Hiérarchie, Forme Hybride• Coûts de Production et de Transaction

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NIE: a theory for the analysis of Governance ofInter-individual Coordination

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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

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Marché, Hiérarchie, Forme Hybride

Marché Hybride Hyérarchie

k

CG

k1 k2k’

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Quel cadre de mise en œuvre ?

• Contrats nécessitent– Mécanisme d’exécution en dernier ressort: Enforcement– Droits à contractualiser au départ: Droit de Propriété

• Cadre institutionnel– Cadre de l’échange– Réduction des coûts de l’échange

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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

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The Transactional Approach to PropertyRightsMeasuring

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

16Centralized vs. Decentralized PRs Settlement

• Scale, Scope & LearningEffects

• Increased consistency (Reducedlevel of conflicts)

• Collective WelfareMaximization (in case ofexternalities)

• Mal-adaptation• Distortions in the

allocation 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

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Two Main Lines 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

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QuatreNiveaux

d’AnalyseComplé-mentaires

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L’économie de la Gouvernance

Gouvernance

Gestion des interactions à traversla construction de “droits”

(d’accès et d’usage)

Rules setting

“measurementcost”

“Enforcementcosts”

Coûts de Transaction

Etablissementde règles et de

droits

Mise en œuvredes Règles

Fourniture d’un“Ordre”

= Bénéfices

IIEmergences et Evolutions des Cadres

Institutionnels

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21MotivationTwo main views of institutions in economics

and two visions of Institutional Changes

Institutions as (designed) rulesof the game

Institutional Framework:Political Competition

Institutional Arrangements:Economic Competition

Institutions as (self-enforced) equilibrium of

games

Destabilization of a prevailingequilibrium

…and processes ofconvergence toward a new setof shared beliefs

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Outline

• Logic of collective order formation=> Sponsored Orders

• Incentives to climb the institutional ladder => Competition among Orders

• Strategic Interplay among Sponsors => Coopetition among kernels

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23Functions of governance level:Provision of an order

GovernanceManaging interactions through

the definition of “propertyrights”

Rules setting

“measurementcost”

Enforcementcosts

Transaction costs

Rulessetting

Rulesenforcement

Provision of aneconomic “order”

24Our contribution

• We provide an endogenous justification forcharacteristics of alternative institutional levels of order

provision• We explain how & why institutions at one level might

climb the “institutional ladders”

Multiples bilateral orders (bilateral GS)

Sets of collective & “local” orders(“intermediate institutions”)

Uniform & genericorder (“genericinstitutions”)

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AnalyticalFramework

• Assumptions– Heterogeneity of agents– Coordination: Trade and Provision of Collective

Resources– Distance/Proximity: territorial, preferences, agents’

characteristics, etc.– Mix of rent-seeking and seek for efficiency gains

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Convergence/Divergenceof Interests

(2, 2)(10,10)Rule 2

(10,10)(2, 2)Rule 1

Rule 2Rule 1CoordinationGame

(5, 1)(8 , 10)Rule 2

(8 , 10)(3, 6)Rule 1

Rule 2Rule 1Battle ofSexes

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The Evolution of the Bargaining Game

(5, 1)(7 , 12)Rule 2

(7 , 12)(2, 5)Rule 1

Rule 2Rule 1Battle ofSexes

(5, 1)(8 , 10)Rule 2

(8 , 10)(3, 6)Rule 1

Rule 2Rule 1Battle ofSexes

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The Concept of “Maladaptation” and the Negotiation of Common Orders

Transaction Featuresor

States of the World

Transaction Costs

B’s Exit Option

A’s Exit Option

A’s Cost of Order 1

B’s Cost of Order 1

O X

B’s Cost of Order 2

A’s Cost of Order 2

= MaldaptationCosts for B If rule 1

applies

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The evolution of B’s bargaining power when facing a growing “club” of order 1 adopters

Transaction Featuresor

States of the World

Transaction Costs

B’s Exit Option

A’s Exit Option

A’s Cost of Order 1

B’s Cost of Order 1

O X

B’s Cost of Order 2

A’s Cost of Order 2

New B’s Exit Option

A’s Cost of Order 1

X’

30Dynamics of the Evolution of Institutions

• Insight: Alternative governance level pertain to a commonlife-cycle model of institutional evolution

• Main argument: Like lava, some local institutions spreadand “froze” and become generic and mandatory ones

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31Dynamic of Institutions

Local Global

Negotiable

Mandatory

Bilateral institutionsof governance

Intermediateinstitutions

Generic

institution

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Local orders become global

• Why is there incentives for local institutions to grow?– Direct positive network externalities Expansion widens the scope of low TC’s deals– Indirect positive network externalities New adopters reinforce the attractiveness of a given institution

⇒ Competition among local institutions // standard race

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33Negotiable orders become rigid

• Local institutions are voluntary devices⇒ exit is always possible

– Quality of the collective rules has to be enhancedto meet external optionsRules that are initially rough become moreefficiently designed and more tailored to particularneeds

– Exit options reduce and disappear⇒ At the end of such process, there is no longer

margins of negotiations

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The Emergence and Evolution of Institutions 0

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The Emergence and Evolution of Institutions 1

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The Emergence and Evolution of Institutions 2

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The Emergence and Evolution of PrivateInstitutions 3

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The Emergence and Evolution of PrivateInstitutions 4

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The Emergence and Evolution of Private Institutions:an Accumulation of Layers Process

Step 0

Step 1

Step 2

Step 3

Step 4

A cross section view

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Incentives to climb the institutional ladders

To sum up: With the passing of times• Incentives to expand: “Winning” local institutions become more

attractive and face less competitive pressure• Incentives to enhance efficiency: initial rules become more complete

and broader in scope⇓

Reductions of both outside options and margins for negotiationsThe individual benefits of membership increase and the outside options

decrease: Emerging institutions shift⇒ from local to global

⇒ from negotiable to mandatory⇒They become “frozen”

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Horizontal Competition

Competitive Decisions by “kernels”– Improving Efficiency (Uniform Reduction of

TCs)– Switching Cost Manipulation (Rising

acquisition costs)– Poaching of “Go-Betweens”– Explicit Merger

=>Kernel’s members drivers of formalization … while Formalization make their position

contestable

MainenablingConditionNature ofthe Instit.

Informal

+ formal

Main CausalFactorStruct ofRel.Network

Distant

Intertwined

42Vertical CompetitionAvaillable Decisions by “kernels” of “Frozen” Institutions

1. Doomed to failure2. Cognitive boundaries3. Increase internal competition (while

mutual recognition)

Increasing amount of resources dedicatedto a zero-sum political competition game

1. Eradication/Confinement2. Substitution3. Recognition*

1. Strengthening Power2. Allowing negotiations and

Compromises

“External” Competition ofSuccessful Private Institutions

“Internal” Competition to takeControl of the formal levers

*Driving Factors:Generic Instit : Degree of Competition among (more) generic institutions; Heterogeneity, Pace of neededevolutionLocal Instit: Degree of horizontal competition

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Provisional Conclusion

• Foundations for an endogenous justification for thecoexistence of several “levels” of governance

• Life-cycle “model” of institutional evolutions consistentwith previous NIE analysis

• Many sources of variations that must be addressed inorder to get a more accurate picture– Systematic analysis of the impact of the nature of coordination problems on

Transaction costs (i.e. // Transaction Features à la Williamson)– Constitutionalized vs. Non-Constitutionalized Orders (i.e. Public/State vs

Private)– Discrepancies between Rule Making and Enforcement levels– Conditions of emergence, growth, stagnation, success/failures– + many more…

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III. Ordre Public / Ordre Privé

• The Economics of Multilvel Governance• Public vs. Private Institutions

– In Static: Constitutionalized vs. Non-Constitutionalized Orders– In Dynamic: the Process of Constitutionlization

• Some Implications– The National vs. International/Global Context of Regulation– The Developed vs. Developing Context

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Benefits/Costs of Collective of Governance

The Centralization Tradeoff

• Scale & Scope Effects• Learning and

Specialization Benefits• Reduction of Collective

Welfare Losses(Increased consistency among localrules, Internalization ofexternalities, Positive networkeffects in the use of commonstandards of interactions, …)

• Static Mal-adaptation(Increasing heterogeneity ofIndividual Preferences)

• Dynamic Mal-adaptation(Reduced Renegotiability)

• Information costs(Increasing InformationAsymetries)

• EnforcementRequirements (IncreasingIncentives to Free Ride)

• Private Capture(Increasing Incentives to distortcoll. Gov. in favor of a minority)

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The “Division of Labor” between Governance “levels”Two Levels of Complementarities• “Subsidiarity”

– “Common problems” to be solved by generic institutions e.g. Liability Rules

– “Community Problems” to be solved by intermediary Institutions e.g. Quality Setting

– “Inter-individual” Problems to be solved by Contractual Agreements e.g. Pricing

• “Check and Balance”– Generic Institutions

• to control for monopoly capture by private institutions• to reinforce the bounded enforcing capabilities of Private Institutions

– Local Institutions and Governance Mechanisms• to allow innovation• To limit the discretionary power of those in control of public institutions

(and therefore to constrain Public Institutions not to be too inefficient)

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Public vs. Private Regulators& Levels of Coordination

• PublicConstitutional Delegation by Citizens– “Legitimacy” to build/design “collective interest”– Monopoly of legitimate violence to guarantee

enforcement=> Orientation toward legitimacy

Order difficult to challenge• Private

Bounded Delegation by Stakeholders– Competitive incentives to build and defend “club

goods”– Enforcement capabilities based on adhesion=> Orientation toward local efficiency

Permanently questioned equilibrium

State

Private Instit.

Individual Agent

Constitutional DelegationTargeted and BoudedDelegationPrescription (Influence,Norms, Rules)

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Constitutionalisation in HistoricalPerspective

Internalcompetition

External competition

MigrantTribes

AntiqueEmpires

FeudalKingdoms

Absolutist/Mercantilis

t States Early 19th

Century,Liberal States

21st CenturyGlobalisation

Post-WW IIWelfare States,

cum tradeintegration

highWestphalianconstitutional

pact

Firstamendment

Secondamendment

Constitution ofthe world ?

The Consistency of Social Contracts Regimes

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Two Processes/States of Constitutionalization

• Despotic– Unequal Distribution of Rights

=> Weak legitimacy to establish the common interest– Communities to provide local public goods

=> Persistence of traditional solidarities

• Liberal– Equality in Rights

=> Logic of extension of “fundamental rights”– State as only providers of public goods

=> Logic of extension of State intervention

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National Context: Issues• Monopoly position of the Public Regulator

– No competition: weak incentives to reach efficiency– High (market) power: strong incentives to capture rents

• Low “independence” of Private/Self Regulators• Bounded ability to challenge the public order• High incentives to “collude” with the Public Regulator

(to control competition by alternative regulators and tocapture rents

⇒Necessity of a Relevant Organization of PublicAuthorities with⇒“Check and Balances” and…⇒“Accountability”

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The International Context

• Public Regulators no longer in monopoly position(// Private Regulators)– Incentives to seek for efficiency, but

• What efficiency ? e.g. National Wealth of National Champions• No longer holder of the “General Interest”

– Weak enforcement capabilities

• Private Regulators no longer local– Ability to implement Global Orders (and to escape public capture),

but• Low accountability and will to promote club members’ interests

– Possible excessive enforcement capabilities• Sustainability of Monopoly Power in matter of Coordination Standard

Setting

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Coordination Levels and Natureof Delegation in the Present

Global Governance

Public CompleteOrder

(Integratingexternalities/ Defining

collective welfarestandards)

Interindividual

PrivateIncomplete Order(Bounded coordinationproblems are solved) Nation State

Global

Contract

ProfessionalCommunities

TerritorialCommunities

Supra-NationalOrganization

NGO IGO

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The Current Global Governance Framework

Inter-Govtal Org. Int. Private. Instit.

State

Private Instit.

Individual Agent

Constitutional DelegationTargeted and Bouded DelegationPrescription (Influence, Norms, Rules)

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International Governance:Several Possible Models

Hegemon Federation of National States Federal State (US) (UN) (EU)

Hegemo.Gvt

Natio. Gvt

Global Gvt

Natio. Gvt Natio. Gvt

Global Gvt

Natio. Gvt Natio. Gvt

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Developing Context• Weak legitimacy (and accountability) of the Public

Regulator– No social contract: weak incentives to target collective efficiency– High (market) power: strong incentives to capture rents

• Strong “independence” of Private/Self Regulators• Extended ability to challenge the public order• High incentives to “collude” with the Public Regulator (to control

competition by alternative regulators and to capture rents)⇒No Relevant Organization of Public Authorities with

⇒Kleptocraty⇒Instability

IV.L’économie politique

constitutionnelle

•Research Program•Concepts of Constitutions•Separation of Power•Horizontal Separation of Power

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Research Program• Hobbes… and Buchanan• Social Contract based on Normative Individualism:

nobody's goals and values should a priori be moreimportant than those of anybody else

• Pareto-criterion applied to collectivities: Rules that haveconsequences for everybody in society can only beevaluated as advantageous if every single member of thatsociety has voluntarily agreed to them => Unanimity

• The state as a constitutional contract• Topics

– Unanimity test to assess rules– Self-enforcement of the constitutional contract ?

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Concepts of Constitution• Social Contract

– Disarmament contract to overcome the "equilibrium ofanarchy" in which marginal costs and returns forproducing, stealing and protecting goods are equally high=> Logically inconsistent but normative criteria

• Incomplete Contract– Aghion and Bolton (2003): “less than unanimity ex post

decision” is efficient in case of unforeseen contingencies=> Trade-off between minority protection and flexibility

• Principal Agent– How to guarantee the rights incentives of the governing

to lead them to maximize the governened wealth (e.g.elections)

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Concepts of Constitution (ctnd.)• Precommitment Device

– // Ulysses bounded against the mast: protection against changes ofpreferences

• Bundle of Conventions– "Establishing a constitution is a massive act of coordination that

creates a convention that depends for its maintenance on its self-generating incentives and expectations" (Hardin, 1989)

• 1) A contract serves to solve a Prisoners’ Dilemma whereas a constitutionserves to solve a coordination game.

• 2) to be valid, the explicit consent of the contracting parties is necessarywhereas a constitution can be viable as long as there is no seriousopposition.

• 3) The enforcement of a contract is secured by the availability of externalsanctions whereas a constitution is secured by the immense difficulty ofestablishing an alternative constitution.

• 4) Complete contingent contract are static,whereas constitutions are moreeasily amenable to evolution

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Separation of Power• Separation

– Brennan & Hamlin (1994): Duopoly model• Efficiency of horizontal separation due to competition• Potential inefficiency of vertical separation due to double

marginalization– Persson, Roland, Tabellini (1997)

• Sources of politicians capture: misuse of power; informationadvantages

• Efficiency of checks and balances

• Horizontal vs. Vertical Separation of Power

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Horizontal Division of Power

• Presidential vs. Parliamentary Regimes– (1) Government spending 6% of GDP lower.– (2) Size of the welfare state 3% GDP lower– (3) influence on the budget deficit is marginal;– (4) Lower levels of corruption.– (5) No significant differences in the level of government

efficiency– (6) seem to be a hindrance to increased productivity but

this result is significant on the 10%-level only

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Horizontal Division of Power

• Judiciary and Rule of Law– Impact of rule of law on efficiency

• Judiciary as guarantor of property rights• Judicial Independence

– Endogeneous explanation of raising « etat de droit »• Interest of the legislator in an indepedant judiciary