Saturday, January 3, 2009

Harris on migration of legal-economic institutions

"The first generation of new institutional economists took institutions as given and as exogenous, and studied their effect on the market and on economic performance," writes Ron Harris, Tel Aviv University, in an interesting new paper. The first generation "dealt with questions such as what types of institutions allow economic growth, or what kinds of exogenously endowed institutions facilitated the rise of the West."
In the second generation of studies, the question was how institutions developed. The initial answer was that economic change, in the form, for example, of expanding markets or new technologies, changed the incentive for creating and altering institutions (Alchian and Demsetz, 1973; Libecap, 1978). The more advanced answer was that legal-economic institutions were not supplied submissively by the state upon demand. Scholars (e.g., Libecap, 1989; Rosenthal, 1992) began to recognize the effect of political and social factors, of pre-existing institutions and legal building blocks, of historical paths and contingencies, on the development of legal-economic institutions. Elements in the environment as a whole were seen as potentially relevant, requiring theoretical modeling and empirical investigation, to the study of the dynamic evolvement of institutions. In addition, a feedback loop was identified between the evolvement of institutions and the performance of the economy. In other words, an attempt was made to endogenize both economic and institutional factors, in order to account for changes in both.
In recent years, a comparative perspective was added. The new comparative question was why did one environment give rise to one type of institution while another gave rise to an institution of a different type? For example, why did North African merchants organize their agency relationship in multilateral and reciprocal reputation-based coalitions while the Italians relied on bilateral and single-directional agency relationships enforced by the State (Greif, 1994. See also Greif, 2006b)? Why did the corporation develop in Europe and not in Islamic civilization (Kuran, 2005)?...Why did the US give rise to dispersed ownership of public corporations while Germany developed concentrated (La-Porta et al., 1998. See also Roe, 2006; Roe and Gordon, 2004)? The general framework was still that institutions reciprocally shaped and were shaped by their environment. The comparison helped to isolate and identify the elements in each environment that molded its studied institution.
A crucial element that is missing from this analysis is the possibility that institutions may have been transplanted from one environment to another. If institutions can indeed migrate between environments, then the explanation for the appearance of a specific institution in a given environment may result not only from the indigenous and reciprocal interaction between the environment and the evolving institution. It may be the outcome of a different mechanism that affects the migration of institutions and their transplantation. This is a neglected aspect in the theory of the development of legal-economic institutions. A main objective of this article is to call attention to this neglect.

The article is The Institutional Dynamics of Early Modern Eurasian Trade: The Commenda and the Corporation. The abstract fills it in:
The focus of this article is on legal-economic institutions that organized early-modern Eurasian trade. It identifies two such institutions that had divergent dispersion patterns, the corporation and the commenda. The corporation ended up as a uniquely European institution that did not migrate until the era of European colonization. The commenda that originated in Arabia migrated all the way to Western Europe and to China. The article explains their divergent dispersion based on differences in their institutional and geographical environments and on dynamic factors. It claims that institutional analysis errs when it ignores migration of institutions. It provides building blocks for the modeling of institutional migration.