Economics Department Prof. Chris Kingston Amherst College [email protected] Spring 2014 314 Converse Hall (1/14) Econ 479: Economics of Governance and Institutions All economic activity takes place within a framework of institutions, including both formal laws and contracts, and informal norms and conventions. Institutions constrain individual behavior and thereby affect resource allocation, income distribution, learning, and economic growth. This course introduces recent approaches to the study of institutions in economics and political science, with particular emphasis on game-theoretic applications to economic history and development, and to theories of institutional stability and change. The class will be discussion-based, so regular attendance is mandatory and your grade will be partly (30%) based on attendance and class participation. So that our discussions can be productive, it is crucial that you do the reading for each class in advance. To provide incentives toward this end, a response (200–300 words) is due before each class; this should be in the form of a contribution to an online discussion on the course Moodle website and should be posted, at the latest, by 9pm on the night before class, so that others have an opportunity to read and respond. These discussion responses are worth 30% of your final grade. Don’t just summarize the paper. For example, you might discuss some of the following: • What is the main hypothesis or theoretical argument? What was unclear to you? • Is the question the paper addresses important? Why/why not? • What assumptions are made? Are they reasonable? Are they necessary? • How is the argument supported empirically? • Is the argument convincing? Why/why not? What are its strengths/limitations? • How is the argument related to other papers we have read, or other arguments that you may have come across elsewhere? • Can you think of other applications or projects based on the paper’s ideas? Or interesting extensions or modifications of the model? The other written course requirement is a research paper, worth 40% of your total grade, on any topic of your choice broadly related to the material covered in class. I will work with each of you individually to help you identify a topic and an approach. The goal is not to create a polished piece of original research, but simply to find an interesting idea (which might be quite simple) and begin to think about how to apply the tools from this course to study it. Shortly after spring break, we will devote one class to brief 5-minute presentations of research proposals. The final paper (12-15 double-spaced pages) is due by the end of classes. Research project: Research begins with a question: something you don’t know the answer to but would like to. The goal of research is to gain new insight into your question, but you do not need to begin with an answer; begin with a question. For a promising research topic, you are looking for an interesting, meaningful question that is answerable but unanswered (or at least not fully answered). Generally you should be looking to explain a puzzling pattern of behavior rather than a single important event; and rather than simply describing a phenomenon of interest you should be looking to investigate its causes or consequences. You should also be able to articulate an answer to the “so what” question: why others should believe that understanding the answer to this question matters. However, finding a topic is also an open-ended process: begin with what you are interested in; your question itself will likely evolve and become more precise as you investigate the theories (ideas about the motivations for and consequences of human behavior, and how the world works) and empirical evidence (of various kinds: e.g., anecdotal/biographical, historical, statistical) that will help you refine your question and seek answers. Periodically, you may find yourself becoming puzzled, confused, disheartened, asking dumb questions, and realizing that you have wasted a lot of effort doing something that turned out to be unnecessary/misguided. That’s all good; keep going. Your goal, broadly, is to produce a quantity of research that could be written up as a 15-page term paper. However, there is no set length or format requirement; content is more important than word count, and this is about the intellectual journey at least as much as it is about the end product. Accordingly, evaluation will be based on your process as well as product. We will adopt a loosely structured approach as described below, which may be liberally adapted to fit as your project unfolds. A two-page summary of your progress is due every 3 weeks as detailed below; we will periodically meet individually to discuss your project and progress. 2/7: Identify three possible topics: What is puzzling about the topic? Why do you consider the questions important? How would you persuade others that they should care about these questions? Meet to discuss during week 3. 2/28: Narrow down to one topic and write an annotated bibliography outlining the contributions of four papers related to this topic. This is the genesis of what will eventually be a larger literature review. Meet to discuss during week 6. 3/28: Theory and Evidence. Gain mastery of an existing model relevant to your question and begin to think about how to apply or modify it to address your question. How you might test/evaluate your argument? What would ideal evidence look like? What kind of evidence is available? How reliable is it? Meet to discuss during week 9. 4/18: Putting it all together: Are your theoretical assumptions and results reasonable in the light of the evidence? Is your model useful for explaining incentives/motivation/outcomes, as compared with a rhetorical/descriptive argument? Does the evidence provide support for one theory over other possible theories? Meet to discuss during week 12. 5/6: Final paper: due on the last day of class. Readings The following is a draft of the reading list. The required reading for each class is underlined; optional suggestions for further reading on related topics are given in italics. Links to all required readings will be posted on the course website. A. Introduction i) Sugden, “Spontaneous Order”, Journal of Economic Perspectives 3(4), 1989. Young, “The Economics of Convention”, Journal of Economic Perspectives, Spring 1996. Zerbe and Anderson, “Culture and Fairness in the Development of Institutions in the California Gold Fields”, Journal of Economic History, March 2001. North, “Institutions”, Journal of Economic Perspectives 5(1), 1991. Myerson, “Justice, Institutions, and Multiple Equilibria”, Chicago Journal of International Law, 2004. ii) Milgrom, North and Weingast: “The Role of Institutions in the Revival of Trade: The Medieval Law Merchant, Private Judges, and the Champagne Fairs”, Economics and Politics, 1990. Greif, “The fundamental problem of exchange: A research agenda in historical institutional analysis”, European Review of Economic History, 2000. Benson, “The Spontaneous Evolution of Commercial Law”, Southern Economic Journal, January 1989. Baron, “Private Ordering on the Internet: The eBay Community of Traders”, Research paper no. 1709, Stanford GSB, December 2001. Edwards and Ogilvie, “What Lessons for Economic Development Can We Draw from the Champagne Fairs?”, Explorations in Economic History, 2012. Klein, “Promise Keeping in the Great Society: A Model of Credit Information Sharing”, Economics and Politics, 1992. Guha, “Who will monitor the monitors? Informal law enforcement and collusion at Champagne”, Journal of Economic Behavior and Organization, 2012. B. Private order i) Hayek, “The Use of Knowledge in Society”. American Economic Review 35(4), 1945. Sections I-VI. and Radford, “The Economic Organization of a P.O.W. Camp”, Economica 12(48), 1945. and Read, “I, Pencil”, 1958. Kranton and Minehart, “A Theory of Buyer-Seller Networks”, American Economic Review, June 2001. ii). Bowles, “Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions”, Journal of Economic Literature 36(1), 1998. Rege, “Social Norms and Private Provision of Public Goods”, Journal of Public Economic Theory 6(1), 2004. Zak, “Moral Markets”, Journal of Economic Behavior and Organization, 2011. Akerlof and Kranton, “Identity and the Economics of Organizations”, Journal of Economic Perspectives, 2005. Platteau, “Behind the Market Stage where real societies exist – Part II: The Role of Moral Norms”, Journal of Development Studies, 1994. Gneezy and Rustichini, “A Fine is a Price”, Journal of Legal Studies, 2000. iii). Coase, “The Problem of Social Cost”, Journal of Law and Economics, 1960. Sections I- IV. and Ellickson, “Of Coase and Cattle: Dispute Resolution Among Neighbors in Shasta County”, Stanford Law Review, Feb. 1986. Sections: Introduction, I, IV and V. Farrell, “Information and the Coase Theorem”, Journal of Economic Perspectives, 1987. Ellickson, Order without Law: How Neighbors Settle Disputes. Harvard University Press, 1991. Ellickson, “A Hypothesis of Wealth-Maximizing Norms: Evidence from the Whaling Industry”, Journal of Law, Economics and Organization, 1989. Kantor, “Razorbacks, Ticky Cows, and the Closing of the Georgia Open Range: The Dynamics of Institutional Change Uncovered”, Journal of Economic History, 1991. Bernstein, “Opting Out of the Legal System: Extralegal Contractual Obligations in the Diamond Industry”, Journal of Legal Studies, 1992. C. Commons and Anticommons i). Sethi and Somanathan, “The Evolution of Social Norms in Common Property Resource Use”, American Economic Review 86(4), 1996 Hardin, “The Tragedy of the Commons”, Science, 1968. Ostrom, Governing the Commons, Cambridge Univ. Press, 1990. Baland and Platteau, “Wealth inequality and Efficiency in the Commons, Part I: The Unregulated Case”, Oxford Economic Papers, 1997. Faysse, “Coping with the Tragedy of the Commons: Game Structure and Design of Rules”, Journal of Economic Surveys, 2005. Casari, “Emergence of Endogenous Legal Institutions: Property Rights and Community Governance in the Italian Alps”, Journal of Economic History, 2007. Bogart, “Neighbors, networks and the development of transport systems: explaining the diffusion of turnpike trusts in eighteenth-century England”, Journal of Urban Economics, 2007. Eggertsson, “No experiments, monumental disasters: Why it took a thousand years to develop a specialized fishing industry in Iceland”, Journal of Economic Behavior and Organization, 1996. ii) Heller, “The tragedy of the anticommons: A concise introduction and lexicon”, Modern Law Review, 2013 and Buchanan and Yoon, “Symmetric Tragedies: Commons and Anticommons”, Journal of Law and Economics, 2000 Heller and Eisenberg, “Can Patents Deter Innovation? The Anticommons in Biomedical Research”, Science, 1998. David, “The Economic Logic of “Open Science” and the Balance between Private Property Rights and the Public Domain in Scientific Data and Information: A Primer”, working paper, 2003. D. Trust, Communities, and Culture i) Carmichael and MacLeod, “Gift Giving and the Evolution of Cooperation”, International Economic Review 38(3), August 1997. Brinig, “Rings and Promises”, Journal of Law, Economics and Organization, 1990. Kingston and Wright: “The Deadliest of Games: The institution of dueling”, Southern Economic Journal, 2010. Alfani and Gourdon, “Entrepreneurs, formalization of social ties, and trustbuilding in Europe (fourteenth to twentieth centuries)”, Economic History Review, 2012. Bowles and Gintis, “Recasting Egalitarianism: New Rules for Communities, States and Markets”, 1993. ii) Greif, “Cultural Beliefs and the Organization of Society: ”, Journal of Political Economy 102(5), 1994. Greif, “Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition”, American Economic Review, 1993. Greif and Tabellini, “Cultural and Institutional Bifurcation: China and Europe Compared”, American Economic Review (Papers and Proceedings), 2010. Fafchamps, “Solidarity Networks in Preindustrial Societies: Rational Peasants with a Moral Economy”, Economic Development and Cultural Change, 1992. Coate and Ravallion, “Reciprocity without commitment”, Journal of Development Economics, 1993. Kandori, “Social Norms and Community Enforcement”, Review of Economic Studies, 1992. Bowles and Gintis, “Social Capital and Community Governance”, Economic Journal, 2002. Edwards and Ogilvie, “Contract Enforcement, Institutions and Social Capital: the Maghribi Traders Reappraised”, March 2008. Greif, “Contract Enforcement and Institutions Among the Maghribi Traders: Refuting Edwards and Ogilvie”, July 2008. Rubin, “Institutions, the Rise of Commerce and the Persistence of Laws: Interest restrictions in Islam and Christianity”, Economic Journal, 2011. Kuran, “Why the Middle East is Economically Underdeveloped: Historical Mechanisms of Institutional Stagnation”, Journal of Economic Perspectives, Summer 2004. Kranton, “Reciprocal Exchange: A Self-Sustaining System”, American Economic Review 86(4), 1996. Dixit, “Trade Expansion and Contract Enforcement”, Journal of Political Economy, 2003. Fafchamps, “The Role of Business Networks in Market Development in Sub-Saharan Africa”, March 1999. Kingston, “Intermediation and Trust”, Ekonomiaz, 2011. Greif, “Institutions and Impersonal Exchange: The European Experience”, Olin Program Working paper No. 284, 2004. Fearon and Laitin, “Explaining interethnic cooperation”, American Political Science Review, 1996. Varshney, Ethnic conflict and Civic Life: Hindus and Muslims in India, Yale U. Press, 2002. E. Firms i) Bowles and Gintis, “Power and Wealth in a Competitive Capitalist Economy”, Philosophy and Public Affairs, Autumn 1992. Simon, “Organizations and Markets”, Journal of Economic Perspectives 5(2), Spring 1991. Bowles and Gintis, “The Revenge of Homo Economicus: Contested Exchange and the Revival of Political Economy”, Journal of Economic Perspectives, 1993. Bowles and Gintis, “Contested Exchange: New Microfoundations for the Political Economy of Capitalism”, Politics and Society, 1990. Raff and Summers, “Did Henry Ford pay Efficiency Wages?”, Journal of Labor Economics, 1997. ii) Aghion and Holden, “Incomplete Contracts and the Theory of the Firm: What have we learned over the past 25 years?”, Journal of Economic Perspectives, 2011. Hart, “Incomplete Contracts and the Theory of the Firm”, Journal of Law, Economics and Organization, Spring 1988. Coase, “The Nature of the Firm”, Economica 4(16), 1937. Gibbons, “Four formal(izable) theories of the firm”. Journal of Economic Behavior and Organization, 2005. Williamson, “Transaction Cost Economics: How it works, where it is headed”, De Economist 146(1), 1998. Tirole, The Theory of Industrial Organization, MIT press, 1988. Coase, “The New Institutional Economics”, American Economic Review 88(2), 1998. Klein, Crawford and Alchian, “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process”, Journal of Law and Economics, 1978. Hart, Firms, Contracts, and Financial Structure, Clarendon press, 1995. Pages 1-55. Holmstrom and Roberts, “The Boundaries of the Firm revisited”, Journal of Economic Perspectives, Fall 1998. Zenger and others, “Informal and Formal Organization in New Institutional Economics”, working paper, 2001. Gibbons, Baker, Murphy, “Relational Contracts and the Theory of the Firm”, Quarterly Journal of Economics, 2002. Allen, “The British Navy Rules: Monitoring and Incompatible Incentives in the Age of Fighting Sail”, Explorations in Economic History, 2002. Silverman and Ingram, “Managing agency problems in early shareholder capitalism: an exploration of Liverpool shipping in the 18th century”, working paper, 2012. iii) Kingston, “Marine Insurance in Britain and America, 1720-1844: A Comparative Institutional Analysis”, Journal of Economic History, 2007. Paul David, “Clio and the Economics of Qwerty”, American Economic Review, 1985. North, Institutions, Institutional Change and Economic Performance, 1990. Kingston, “Marine Insurance in Philadelphia during the Quasi-War with France, 1795- 1801”, Journal of Economic History, 2011. Kingston, “"Governance and Institutional Change in Marine Insurance, 1350-1850", European Review of Economic History, 2014. Kingston and Caballero, “Comparing Theories of Institutional Change”, Journal of Institutional Economics, 2009. Greif and Kingston, “Institutions: Rules or Equilibria?”, chapter 1 in Caballero and Schofield, eds., Political Economy of Institutions, Democracy and Voting, 2011. Greif and Laitin, “A Theory of Endogenous Institutional Change”, American Political Science Review. Roland, “Understanding Institutional Change: Fast-moving and Slow-moving institutions”, Studies in Comparative International Development 38(4), Winter 2004. F. The State: Anarchy and Order i.) Bates, Greif and Singh, “Organizing Violence”. Journal of Conflict Resolution, 2002. Hardin, “Hobbesian Political Order”, Political Theory, May 1991. Skaperdas, “Anarchy”, September 2005. Hirshleifer, “Anarchy and its Breakdown”, Journal of Political Economy 103(1), 1995. Grossman and Kim, “Swords or Ploughshares? A Theory of the Security of Claims to Property”, Journal of Political Economy, 1995. Grossman, “Make Us a King: anarchy, predation and the state”, European Journal of Political Economy, 2002. Garfinkel and Skaperdas, “Economics of Conflict: An Overview”, April 2006. Dixit, “Governance Institutions and Economic Activity”, American Economic Review, 2009. Dixit, “On Modes of Economic Governance”, Econometrica, 2003. ii) Weingast, “The Political Foundations of Democracy and the Rule of Law”, American Political Science Review 91(2), June 1997. North and Weingast, “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in 17th Century England”, Journal of Economic History, December 1989. Findlay and Wellisz, “The Theory of the State”, September 2003. Olson, “Dictatorship, Democracy and Development”, American Political Science Review 87(3), Sept 1993. McGuire and Olson, “The Economics of Autocracy and Majority Rule: The Invisible Hand and the Use of Force”, Journal of Economic Literature 34(1), March 1996. Moselle and Polak, “A Model of a Predatory State”, Journal of Law, Economics and Organization, 2001. Mittal and Weingast, "Self-Enforcing Constitutions: With An Application to Democratic Stability in America's First Century", Journal of Law, Economics, and Organization, 2011. Weingast, “Self-enforcing constitutions with an application to America’s first century” Posner and Vermeule, “The Credible Executive”, working paper, 2006. iii) Djankov, Glaeser, La Porta, Lopez-de-Silanes and Shleifer, “The New Comparative Economics”, Journal of Comparative Economics 31(4), December 2003. Eggert, Itaya and Mino, “A Dynamic Model of Conflict and Appropriation”, Journal of Economic Behavior and Organization, 2011. Acemoglu, Johnson and Robinson, “Colonial Origins of Comparative Development”, American Economic Review, 2001.