Institutions

In this course, we will discuss the importance of Institutions on the economic activity of
individuals and society. Historically the importance of institutions was recognized by
economists such as Adam Smith and John Stuart Mill who strongly believed that “it was
institutions, not race, that explained why some nations were rich and others poor.” This view
was opposed vehemently by progressives such as Thomas Carlyle who called economics a
dismal science. In the Wealth of Nations, Adam Smith introduced a doctrine that there were
no natural differences among people, there were no natural masters or natural slaves, all
differences can be attributed to “incentives, history and luck.” 1 While discussing the
prosperity of the colonies Adam Smith writes that
“The colonists carry out with them a knowledge of agriculture and of other useful arts, superior
to what can grow up of its own accord in the course of many centuries among savage and
barbarous nations. The carry out with them the habit of subordination, some notion of regular
government which takes place in their own country, of the system of laws that they support it
and of regular administration of justice; and they naturally establish something of the same
kind in the new settlement. But among savage and barbarous nations, the natural progress of
law and government is still slower…”
These words highlight how instrumental institutions are in enhancing the welfare of society.
Such thoughts have also inspired the modern empirical and theoretical work on institutions
and its impact on welfare and growth.
In this course, we will define Institutional Economics (IE) as the study about humanly
devised written and unwritten rules, customs and traditions that constraint human actions
with the objective to reduce uncertainty in exchange and control the environment. In IE we
will depart from “nirvana” economics, where individuals have complete and perfect
information, are perfectly rational and there are no transaction costs. In the real world,
individuals do not have complete or perfect information, they have limited rationality and
transactions costs are real, institutions perhaps emerge to resolve these issues and facilitate

1The Secret History of Dismal Science. Part 1. Economics Religion and Race in the 19 th century
by David M. Levy and Sandra J. Pearl.
exchange. In this course the attempt will be to understand “why economic institutions
emerged the way they did and not otherwise.” (Kenneth Arrow)

Teaching instruction
This will be a discussion-oriented class where each student will be expected to participate in
the class discussion. In each class, we will discuss an idea and perspective. Prior to the class,
students are expected to read a paper and submit a 400-word or less review of the paper at
the beginning of the class. The review will be in word or pdf format; the fonts would be
Cambria (Body) 12.
We will also use podcasts from Library of Economics and Liberty, the Econ Talk hosted by
Russ Roberts (http://www.econtalk.org/) to motivate topics for discussion. In addition to
the papers the students would be expected to listen to the podcasts.

Grading
50% marks are for class participation (a 400-word or less review of papers that will be
assigned. The review will be in word or pdf format; the fonts would be Cambria (Body) 12),
and the other 50% would be the final exam.

Office Hours
Wednesday: 330 PM to 5 PM. Room no. 205

Topics
1. Introduction to Institutional Economics
a. “Institutions”, Douglass C. North Journal of Economic Perspective vol. 5, no. 1,
Winter 1991, pp. 97 – 112
b. “The Institutional Structure of Production,” Ronald H Coase
c. Transaction Cost Economics, Oliver E. Williamson
d. The Theory of Groups and Organizations, Mancur Olson, The Logic of Collective
Action
 e. Beyond Markets and States: Polycentric Governance of Complex economic
Systems, Nobel Prize lecture by Elinor Ostrom
f. Hayek, F. A. (1945). "The Use of Knowledge in Society." The American
Economic Review 35(4): 519-530.
g.
h. Two Concepts of Liberty. Issaih Berlin
https://www.wiso.unihamburg.de/fileadmin/wiso_vwl/johannes/Ankuendi
gungen/Berlin_twoconceptsofliberty.pdf
2. Political Institutions
a. “Dictatorship, Democracy and Development,” Mancur Olson, American
Political Science Review (1993) pp. 567 - 576
b. Olson, Mancur (1986). "Toward a more general theory of governmental
structure" American Economic Review 76(2): 120-125.
c. Olson, Mancur (1991). "Autocracy, democracy, and prosperity" in R.
Zeckhauser (Ed.) Strategy and Choice, MIT Press.
d. Olson, Mancur (1996). "Big bills left on the sidewalk: Why some nations are
rich and others are poor" Journal of Economic Perspectives10(2): 3-24.
e. Lecture Notes on Political Economy, Chapter 1: General Issues, Daron
Acemoglu
3. Legal Institutions of a Market
a. “The Birth of Impersonal Exchange: The Community Responsibility System
and Impartial Justice,” Avner Greif, JEP vol. 20, no. 2, Spring 2006
b. The Many Legal Institutions that Support Contractual Commitments, Gillian K
Hadfield
c. “The Colonial Origins of Comparative Development: An Empirical
Investigation,” Acemoglu Daron, Simon H. Johnson and James A. Robinson,
AER 91(5) 2001
d. Market Institutions and Judicial Rulemaking, Benito Arrunada and Veneta
Andonova
e. Legal Institutions and Financial Development, Thorsten Beck and Ross
Levine
 4. Modes of Governance

5. Contractual Agreements
a. “Towards a Theory of Property Rights.” Harold Demsetz, AER (May) 1967
6. Regulation
7. Institutional Change
8. Special Topics
a. Nudge “Libertarian Paternalism”
b. Inequality

Podcasts: Library of Economics and Liberty website:

http://www.econtalk.org/
 Otteson on Adam Smith
http://www.econtalk.org/archives/2011/06/otteson_on_adam.html
 Boettke on Elinor Ostrom, Vincent Ostrom, and the Bloomington School
http://www.econtalk.org/archives/2009/11/boettke_on_elin.html
 Robert Frank on Coase
http://www.econtalk.org/archives/2014/02/robert_frank_on_2.html
 Acemoglu on Why Nations Fail
http://www.econtalk.org/archives/2012/03/acemoglu_on_why.html
 David Rose on Moral Foundations of Economic Behavior
http://www.econtalk.org/archives/2012/01/david_rose_on_t.html
 Munger on Slavery and Racism
http://www.econtalk.org/archives/2016/08/munger_on_slave.html
 Vernon Smith on Markets and Experimental Economics
http://www.econtalk.org/archives/2007/05/vernon_smith_on.html
 Collier on Democracy and Violence
http://www.econtalk.org/archives/2009/07/collier_on_demo.html

 Coyne on Exporting Democracy after War

 http://www.econtalk.org/archives/2009/07/collier_on_demo.html
 Will Davies on Economics, Economists and the limits of Neoliberalism
http://www.econtalk.org/archives/2016/03/will_davies_on.html
 Michael Munger on Sharing Economy
http://www.econtalk.org/archives/2014/07/michael_munger.html
 Townsend on Development, Poverty and Financial Institutions
http://www.econtalk.org/archives/2011/03/townsend_on_dev.html

 Angus Deaton on Inequality, Trade and the Robin Hood Principle

http://www.econtalk.org/archives/2016/10/angus_deaton_on.html
 Bruce Bueno de Mesquita on Democracies and Dictatorships
http://www.econtalk.org/archives/2007/02/bruce_bueno_de.html
