claude menard university of paris (pantheon-sorbonne) centre d’economie de la sorbonne...

Claude MenardUniversity of Paris (Pantheon-Sorbonne)

Centre d’Economie de la [email protected]

A new Institutional economics approach

13th Summer School on Economic History, Philosophy, and History of Economic Thought,

Acqui Terme,

1-8 settembre 2010

C. MenardContracts and conflicts

Introduction

The complex issue of conflicts in contractual arrangementsThe case of « UNIMIE »


Introduction

General assembly of shareholders

Decides on: distribution of

dividends and ratify the board decisions

Extraordinary assembly of shareholders

Decides on: exclusion of insiders, adaptation of the GS, strategic orientations

Marketing committee

Advises for

marketing decisions

Board of SC

Runs the system

Ethic committee

Manages conflicts among partners


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).


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


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


Introduction

Although operating at a different level,the two approaches are complementary

and interdependent:

1) They both involve properties of the institutional environment

2) They both rely on central concepts of NIE: property rights, contracts, transaction costs.


Introduction

However:

*** Williamsonian branch emphasizes primarily economic transaction costs;

*** Northian branch extends the concept to

political transaction costs.


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



Introduction: Governance at the core (2)Critical mechanisms of governance :

(i) Allocate assets, (ii) delineate control over assets and decisions rights; (iii)monitor payoffs (distribution rules) (iv)define and implement decision-making process; (v) define and implement dispute-resolution devices.



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 involve 4 major characteristics:

‘commitment’ => credibility issue

often on future transactions => time dimension

which requires guarantees hence a coercive dimension



What are the source of conflict here?- All needed mechanisms involve costs:

TRANSACTION COSTS

Ex. of hostage clauses



Because of these costs, contracts are incomplete

-Sources of incompleteness: Bounded rationalityAsymmetries of informationProblems of measure

- Result: contractual hazards



Filling the blanks of incomplete contracts:- interpretation- domination - Mediation- Arbitration- and ultimately breach of contracts etc.



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)



How can conflicts be solved?-> Private ‘order’; see « ethic committee » with UNIMIE-> Courts-> Violence of the State: this is the turf of North


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



Bureau National d’Etudes

Technique et de Développement (BNETD)

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)

Consumers

Bills Pays water bill

Direction de l’Eau

(DE)

Owns Supply Network Supervises Investment

Monitors

Fonds de Développement de l’Eau

(FDE)

Funds investment expenditures Pays part of tariff to FDE to fund

investment

Pays SODECI for investment and social

connections

Fonds National de l’Eau

(FNE)

Used for Debt Service

Pays part of tariff to FNE for debt

service

Manages

Caisse Autonome d’Amortissement

(CAA)

Manages Provides Technical Assistance



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”


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



From there, two possible directions:

1) Role of individuals in solving conflicts and adapting institutions

2) Collective action



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)



=> 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?



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 …)



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.



(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.



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’



-> Development economics

Long run economic performance and institutional indicators

Organized ‘violence’ How to avoid predatory behavior from the state


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)


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?

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