Transcript Menard on a neo-institutionalist perspective

Claude Menard
University of Paris (Pantheon-Sorbonne)
Centre d’Economie de la Sorbonne
[email protected]
Contracts and conflicts:
a neo-institutionalist perspective
13th Summer School on Economic History, Philosophy, and History of
Economic Thought,
Acqui Terme,
1-8 settembre 2010
C. Menard
Contracts and conflicts
Introduction
The complex issue of conflicts in contractual
arrangements
The case of « UNIMIE »
C. Menard
Contracts and conflicts
Introduction
General assembly of
shareholders
Extraordinary assembly of
shareholders
Decides on: distribution of
dividends and ratify the board
decisions
Decides on: exclusion of
insiders, adaptation of the
GS, strategic orientations
Marketing
committee
Advises for
marketing decisions
Board of SC
Ethic committee
Runs the system
Manages conflicts
among partners
C. Menard
Contracts and conflicts
Introduction
Two dominant approaches
in New Institutional Economics,
identified to two leading figures :
Oliver Williamson (Nobel prize in 2009)
and
Douglass C. North (Nobel prize, 1994).
C. Menard
Contracts and conflicts
Introduction
In Williamson’s view:
Conflicts are generated when the potential
opportunism of parties to a transaction is
activated
 because of contractual hazards, or
 because of changes in the institutional
environment.
Limit: breach of contract and/or going to court
C. Menard
Contracts and conflicts
Introduction
In North’s perspective:
conflict is inherent to political systems
 because violence is embedded in the very
nature of the state,
because exerting violence is essential to
the actual development of transactions
limit: violence transforms into predation
C. Menard
Contracts and conflicts
Introduction
Although operating at a different level,
the two approaches are complementary and
interdependent:
1)
2)
They both involve properties of the
institutional environment
They both rely on central concepts of NIE:
property rights, contracts, transaction
costs.
C. Menard
Contracts and conflicts
Introduction
However:
*** Williamsonian branch emphasizes primarily
economic transaction costs;
*** Northian branch extends the concept to
political transaction costs.
C. Menard
Contracts and conflicts
Introduction
I will substantiate this view along the following
lines:
I: Contracts and Conflicts at the
Organizational level
II: Contracts and conflicts at the
Institutional level
Contracts and conflicts:
The Organizational level
Introduction: Governance at the core
=> What do we mean by ‘governance’?
¤ Allocation of rights (property & decision -> payoffs)
¤ Mechanisms needed to monitor and adapt them ex post
¤ creating order to mitigate contractual hazards
¤ in order to take advantage of use of these rights
Contracts and conflicts:
The Organizational level
Introduction: Governance at the core (2)
Critical mechanisms of governance :
(i)
(ii)
(iii)
(iv)
(v)
Allocate assets,
delineate control over assets and decisions rights;
monitor payoffs (distribution rules)
define and implement decision-making process;
define and implement dispute-resolution devices.
Contracts and conflicts:
The Organizational level
Central tool (although not the only one): contracts
(a) mutual agreements
(b) determining rules that organize transfers of
rights
(c) among well specified economic units (the
‘parties’ to a contract)
(d) embedded in institutions in order to be
enforceable
Contracts and conflicts:
The Organizational level
Contracts involve 4 major characteristics:
 ‘commitment’
=> credibility issue
 often on future transactions
=> time dimension
 which requires guarantees
 hence a coercive dimension
Contracts and conflicts:
The Organizational level
What are the source of conflict here?
- All needed mechanisms involve costs:
TRANSACTION COSTS
Ex. of hostage clauses
Contracts and conflicts:
The Organizational level
Because of these costs, contracts are
incomplete
-Sources of incompleteness:
Bounded rationality
Asymmetries of information
Problems of measure
- Result: contractual hazards
Contracts and conflicts:
The Organizational level
Filling the blanks of incomplete contracts:
- interpretation
- domination
- Mediation
- Arbitration
- and ultimately breach of contracts
etc.
Contracts and conflicts:
The Organizational level
All these devices are sources of conflicts and/or
generate conflicts.
-> Importance of clauses for solving
conflicts in contracts.
-> More generally importance of « dispute
solving devices » (Coase)
Contracts and conflicts:
The Organizational level
How can conflicts be solved?
-> Private ‘order’; see « ethic committee »
with UNIMIE
-> Courts
-> Violence of the State: this is the turf of
North
Contracts and conflicts:
The Institutional level
Introduction: Contracts are deeply embedded
in their institutional environment
=> political system at the core
(social organization of contractual
arrangements)
Case of reform of water system in
Cote d’Ivoire
Contracts and conflicts:
The Institutional level
Bureau National d’Etudes
Technique et de Développement
(BNETD)
Caisse Autonome d’Amortissement
(CAA)
Provides
Technical
Assistance
Manages
Direction de l’Eau
Fonds National de l’Eau
(DE)



(FNE)
Owns Supply Network
Supervises Investment

Manages
Used for Debt Service
Fonds de Développement de l’Eau
Monitors
(FDE)

Funds investment expenditures
Pays SODECI for
Pays part of tariff
to FDE to fund
investment
investment and social
connections
Société de Distribution d’Eau de la Côte d’Ivoire
(SODECI)




Responsible for operations and maintenance of
water system
Responsible for billing and collection
Installs ‘social connections’
Performs most investment (with funding from the
Fond de Développement de l’Eau)
Bills
Pays water bill
Consumers
Pays part of tariff
to FNE for debt
service
Contracts and conflicts:
The Institutional level
Northian approach summarized:

Initially heavily influenced by neoclassical economists 
cliometrics
contracts/transactions as engine of growth
(ocean shipping)

But incorporating institutions: theory of institutional change
(book on American Growth)

However, European history shows this is not enough to
explain the “fundamental societal change that had
characterized European economies”
Contracts and conflicts:
The Institutional level



Significant role of new arrangements such as written contracts
enforced by courts (North and Thomas 1973; North 1990)
Problem: Solving conflicts and protecting property rights through formal
enforcement (courts) involves high transaction costs in line with
Coase and Williamson
More generally, not satisfying answers because:
1) formal contracts concern only small part of economic activity
ex. conflict resolution by courts is the exception
2) fundamental role of beliefs and mental models ignored
3) nature and role of the state ignored
Contracts and conflicts:
The Institutional level
From there, two possible directions:
1) Role of individuals in solving conflicts and
adapting institutions
2) Collective action
Contracts and conflicts:
The Institutional level
1)
Role of individuals (North, 1990 …):
Institutional change through “entrepreneurs” (economic and
political) who perceive “that they could do better by altering
the existing institutional framework”.
But:
(a) Perception of desirable changes depend on information
received and how it is processed.
(b) Reforms are “path dependent” -- constrained by the
existing set of institutions and mental models.
(c) Sticky nature of beliefs and institutions (see
underdevelopment)
Contracts and conflicts:
The Institutional level
=> Key issue: how do mental models change?
“social contract” tends to be very conservative
i) because of high political transaction costs of changes
(changing coalitions; changing beliefs)
ii) conflicts tend to spread with extension of impersonal
transactions.
How can individuals, even if they form coalitions,
enforced contracts and favor transactions in that
context?
Contracts and conflicts:
The Institutional level
2) Collective action
(a) Contracts enforced and conflicts solved through
‘informal’ collective action based on shared
mental models
(Greif and the Maghrebi traders in Middle Age)
(b) Contracts enforced and conflicts solved through
violence of the state
(North, 2005; North et al., 2009 …)
Contracts and conflicts:
The Institutional level

Theory developed in 2009: state violence built on political
coalitions. Two possible situations (polar cases)
(i) “Limited access orders”: elites become aware of
advantages of sharing power rather than fighting. They
formed coalitions around specialists in violence who
could protect non-military elites (e.g., traders, clergy)
and limit outsiders’ access to valuable resources.
Violence is “contained” because elites adhere to these
agreements by limiting non-elite access to rents: capture
(rent seeking behavior).
This is the dominant social order.
Contracts and conflicts:
The Institutional level
(ii) “0pen access societies”: emerged in Europe after the
industrial revolution.
Political regimes (federalism) and other institutions
(powerful judiciary) devised to severely limit rent
seeking behavior
These are the exception.
Contracts and conflicts:
The Institutional level

Impact of these theories (Two EXAMPLES)
-> Transaction cost approach to regulation:



Regulatory institutions based on political coalition (subsets
of: government, operators, users)
Problems of “commitment” (ex-ante) and enforcement
(ex-post) at the core
Contracts are not fully self-enforcing. Must be monitored,
controlled, with sanctions at stake
(hence role of ‘violence’
Contracts and conflicts:
The Institutional level
-> Development economics



Long run economic performance and institutional
indicators
Organized ‘violence’
How to avoid predatory behavior from the state
Contracts and conflicts:
CONCLUSION


Key concepts (« golden triangle ») of
New Institutional Approach to conflicts:
¤ Property rights (how to protect them)
¤ Contracts (how to enforce them)
¤ Transaction costs (how to minimize them)
Contracts are part of governance
(but only part of it)
Contracts and conflicts:
CONCLUSION
A REMAINING (and Central) PROBLEM:
HOW TO ARTICULATE PROPERLY THE TWO LEVELS
(ORGANIZATIONAL, INSTITUTIONAL)
notwithstanding that same concepts are used.
Ex. What impact of nature of institutions protecting
more or less efficiently property rights on the
choice of a mode of organisation of transactions
and on development/solution of conflicts?