DOCSLIB.ORG

Inside the Capitalist Firm : an Evolutionary Theory of the Principal Agent-Relation

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Inside the Capitalist Firm : an Evolutionary Theory of the Principal Agent-Relation Inside the Capitalist Firm An Evolutionary Theory of the Principal Agent-Relation Malcolm Dunn Potsdam Economic Studies | 1 Potsdam Economic Studies Potsdam Economic Studies | 1 Malcolm Dunn Inside the Capitalist Firm An Evolutionary Theory of the Principal Agent-Relation Potsdam University Press Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at http://dnb.de. Potsdam University Press 2013 http://verlag.ub.uni-potsdam.de/ Am Neuen Palais 10, 14469 Potsdam Tel.:+49 (0)331 977 2533/ Fax: 2292 E-Mail: [email protected] The monograph series Potsdam Economic Studies is edited by Prof. Dr. Malcolm Dunn. ISSN (print) 2196-8691 ISSN (online) 2196-9302 The document is protected by copyright. Layout and typography: Thomas Graf, Martin Anselm Meyerhoff, wissen.satz Print: docupoint GmbH Magdeburg First published German-language edition Dunn, Malcolm H.: Die Unternehmung als ein soziales System : ein sozialwissenschaftlicher Beitrag zur neuen Mikroökonomie / von Malcolm H. Dunn. - Berlin : Duncker und Humblot, 1998. - 363 S. ISBN 3-428-07852-7 © Duncker & Humblot 1998 Habilitationsthesis Darmstadt 1992 ISBN 987-3-86956-247-6 Simultaneously published online at the Institutional Repository of the University of Potsdam: URL http://pub.ub.uni-potsdam.de/volltexte/2013/6515/ URN um:nbn:de:kobv:517-opus-65151 http://nbn-resolving.de/urn:nbn:de:kobv:517-opus-65151 To Elizabeth Dunn Preface to the English Edition This book deals with the inner life of the capitalist firm. There we find numer- ous conflicts, the most important of which concerns the individual employment relationship. As everyone knows, employees are out to earn as high an income as possible and to avoid doing work that entails physical and psychological wear and tear. Their superiors, on the other hand, pursue the interest of the firm, which consists in lowering the wage costs per unit. The best way to do so is to maximize the amount of work to be performed at a given wage level. So it is no surprise that employees and their superiors often disagree on what constitutes ‘fair pay’ and a ‘reasonable work load’. Just as certain, however, is the fact that employees and their superiors depend on each other to achieve their own re- spective interest. Employees need money, so they need somebody who reckons to profit by hiring them and paying them wages. Managers supervise a labor process that requires the employees to work, for which the firm has agreed to pay them. The antagonistic relationship between the employees and the manag- ers representing the firm is thus founded on their mutual dependence. Because quitting a job or firing an employee carries both, costs and risks, both parties are generally interested in longer-term employment, despite their awareness that the everyday life of the firm constantly gives rise to conflicts that present diffi- culties for all involved. How do employees and their superiors deal with these conflicts? This question is of both practical and theoretical significance. Within economic theory, the principal-agent theory analyzes social interactions in which one actor attempts to motivate another actor to act on his or her behalf. The problem is that even on the basis of a contractual agreement both sides have opportunities to pur- sue their respective interest at the cost of the other, since the actual behavior of the actors cannot be sufficiently supervised. In other words, contracts are only vii rarely comprehensive and precise enough to eliminate the possibility of ‘oppor- tunistic’ behavior. The particularity of the principal-agent theory concerns the manner in which this concept is applied to the employment relationship within the capitalist firm. It makes sense to identify the manager representing the interests of the capitalist firm as the ‘principal’ who issues orders that are to be followed by the employee, the ‘agent’. But it is not at all self-evident that the employee, the agent, should possess a greater amount of information and thus an advantage over the princi- pal. This is an indirect sign of the standpoint to which the principal-agent the- ory is primarily committed: Its purpose is to support the firm and its managers in finding ways and means to influence the behavior of the employees, such that the latter – ideally – act on behalf of their superior. All the techniques and strategies developed and problematized by the principal-agent approach – e.g., increased supervision and the threat of punishment on the one hand, positive incentives such as performance-based pay, improved career opportunities and the creation of a ‘corporate identity’ on the other hand – are guided by the in- terest of the firm, not by that of the employees. And yet, nowhere in the prin- cipal-agent model do we find the assumption that superiors possess a greater amount of information that they can use at the cost of the employee; nor do we find studies that address the question of how an employee can better achieve his or her aims vis-à-vis the principal. The principal-agent theory takes up the perspective of the firm, but not, howev- er, by simply ignoring the well-being of the agent. On the contrary, in all prin- cipal-agent models the ‘optimum’ is a state in which both sides, principal and agent, maximize their utility under given conditions. Hence the principal-agent theory seeks to develop strategies that can turn an inherently antagonistic rela- tionship into a social optimum that takes account of the interests of both sides. Is that not a logical contradiction? Perhaps! The empirical observation that employ- ees generally do not regard their superiors as the ‘opponent’, but rather identify with ‘their’ firm and show ‘pride’ in their work, seems to validate the claim that the inner life of the firm is not only marked by antagonisms, but also by a kind of harmony between the employees and ‘their’ firm. However we might assess the intention of the principal-agent theory and this empirical identification of workers with their employers, what is certain is that viii the concrete actions of the actors involved cannot be sufficiently explained by pointing to the latent economic conflicts between employees and their superi- ors. It is obvious that their social interactions depend on how they perceive and evaluate the employment relationship, including factors such as working condi- tions, the level of pay, etc. Yet, an explanation of this kind cannot be expected from the principal-agent theory. Shirking, to take just one example, is treated by the principal-agent theory as if it were a ‘fact’ and not a moral judgment de- serving explanation. A positive theory of the employment relationship cannot be content to interpret individual behavior as the result of the maximization of utility functions and other conditions, nor can it assume that a uniform amount of information has been ‘asymmetrically’ distributed between the actors, as if there could be any objectively given ‘amount’ of information that could then be distributed unevenly. As much as we must abstract and simplify a great deal in order to share the interest of principal-agent models, they contribute nothing (or very little) to an explanation of the actual conflicts within the firm. Here we have come to what the purpose of this book is and what it is not. To begin, managers will search here in vain for tips on how they can better ‘lead’ their employees. Economists expecting a scientific study on the individual employment relationship, one that derives a social optimum in the sense of a (Nash) equilibrium, will be disap- pointed as well. The purpose of this book is to better understand the actual social interactions within the firm, but without evaluating them normatively. In order to do so, this study not only raises new questions, such as what shirking is really all about, but it will also address and re-examine a number of ‘old’ ques- tions in the theory of the firm. For example, economists have long discussed the issue of whether the primary aim of the capitalist firm is to make a profit, a maximum profit, an adequate profit, or some other goal. There is also contro- versy over whether the assumption of bounded rationality can be viewed as a substitute for the traditional notion of rationality. Another question is whether the production process primarily represents a technically defined ‘input-out- put’ relation, or whether production must be understood as a social process that cannot be illustrated by a production function. Or to take one last example: Is the existence of the firm really owed to a calculation of transaction costs, be- cause hierarchical organizations avoid the costs of transactions on the market? ix Is there really a dichotomy between ‘markets and hierarchies’, as the Nobel lau- reate Ronald Coase claimed in his legendary essay on the nature of the firm? These and other questions surrounding the theory of the firm are treated in de- tail, though the focus of the book concerns individual behavioral patterns and the resulting interactions between the actors in the firm. Why do employees in- crease or decrease their performance? When and why are employees discontent with their working conditions? Do ‘contented’ employees perform better than ‘discontented’ employees? Under what conditions do managers evaluate the be- havior of their employees as ‘shirking’? Clearly, the treatment of these questions goes far beyond the narrow understanding of traditional economics. Alongside economics, therefore, the study also draws upon and evaluates the relevant so- ciological, political, and above all, psychological research. To the accusation that this study is not an economic investigation in the true sense of the term, I can only respond that this depends entirely on what we understand by ‘economics’.
Load more

Recommended publications
  • © 2010 Julia Silvia Feldhaus ALL RIGHTS RESERVED
    © 2010 Julia Silvia Feldhaus ALL RIGHTS RESERVED Between Commodification and Emancipation: Image Formation of the New Woman through the Illustrated Magazine of the Weimar Republic By Julia Silvia Feldhaus A dissertation submitted to the Graduate School – New Brunswick Rutgers, The State University of New Jersey In partial fulfillment of the requirements For the degree of Doctor of Philosophy Graduate Program in German Written under the direction of Martha B. Helfer And Michael G. Levine And approved by ____________________________ _____________________________ _____________________________ _____________________________ New Brunswick, New Jersey October 2010 ABSTRACT OF THE DISSERTATION Between Commodification and Emancipation: Image Formation of the New Woman through the Illustrated Magazine of the Weimar Republic By JULIA SILVIA FELDHAUS Dissertation Directors: Martha B. Helfer Michael G. Levine This dissertation investigates the conflict between the powerful emancipatory image of the New Woman as represented in the illustrated magazines of the Weimar Republic and the translation of this image into a lifestyle acted out by women during this era. I argue that while female journalists promote the image of the New Woman in illustrated magazines as a liberating opening onto self-determination and self- management, this very image is simultaneously and paradoxically oppressive. For women to shake off the inheritance of a patriarchal past, they must learn to adjust to a new identity, one that is still to a large extent influenced by and in the service of men. The ideal beauty image designed by female journalists as a framework for emancipation in actuality turned into an oppressive normalization in professional and social markets in which traditional rules no longer obtained.
    [Show full text]
  • Mark Lynas: ”Six Degrees”) Still People Do Not React…
    PEOPLE BEHAVE IRRATIONALLY TOWARDS CLIMATE CHANGE – What can we do? Marta Cullberg Weston World Bank report With business as usual we will end up in a 3-4 degree warmer world…. For a long time politicians have said they are planning to keep the warming to 2 degrees But not much has happened… A 3-4 degree warmer world is not something we want to live in… (Mark Lynas: ”Six degrees”) Still people do not react… One problem…for a long time the wrong concept was used: ”global warming” which people read literally… Instead it can be all sorts of erratic weather patterns as part of climate change Draughts, forestfires, flooding, storms … Another problem: people do not know the problems of a 3- 4 degree warmer world… In the western world most people ”know” about climate change but we still do not act on our information What contributes to this passivity? The main reason is the human brain… It is not well adapted to handle diffuse threats The threat from climate change is hard for human brains to handle . Diffuse . Invisble -(If CO2 had color we might have solved the problem already) . In the future . Distant The human fear system is not adapted to modern world threats Our ”old brain” reacts to immediate threats Wild animal =Action now --adrenalin flows Dan Gilbert: Four ”threat”-buttons . Actor behind the threat . Present threat . Clear actions to avoid the threat . Violates moral codes Climate change does not press these buttons We need to understand the challenges our brain poses when it comes to acting on the threat from climate change I will outline 4 different kinds of challenges Humans are not always rational! 1.
    [Show full text]
  • Social-Dilemmas.Pdf
    A'I1/. Rev. Psychol. /980. 31;/69-93 Copyright © 1980 by Annual Reviews Inc. All rights reserved SOCIAL DILEMMAS .324 Robyn M Dawes! Department of Psychology, University of Oregon, Eugene, Oregon 97403 CONTENTS INTRODUCTION TO THE LOGIC OF SOCIAL DILEMMAS .. ... ... .................... 170 PROPOSALS FOR ELICITING COOPERATIVE BEHAVIOR.............................. 174 Changing the Payoffs.................................................................................................. 174 From Payoffs to Utilities............................................................................................ 175 Altruism........................... ........... ........ ............ ............ ............................................ 176 Conscience and norms .............. .................................................................... ............ 177 THE MATHEMATICAL STRUCTURE OF DILEMMA GAMES ... ... .................. 178 The "Take Some" Game............................................................................................ 179 The "Give Some" Game ............................................................................................ 179 REVIEW OF THE LITERATURE ABOUT EXPERIMENTAL N-PERSON DILEMMA GAMES .................................................................................... 182 Findings ...................................................................................................................... 183 Involvement .............................................. ............ ............ ........................
    [Show full text]
  • Stochastic Collusion and the Power Law of Learning: a General Reinforcement Learning Model of Cooperation Flache, A
    University of Groningen Stochastic collusion and the power law of learning: a general reinforcement learning model of cooperation Flache, A. Published in: Journal of Conflict Resolution DOI: 10.1177/002200202236167 IMPORTANT NOTE: You are advised to consult the publisher's version (publisher's PDF) if you wish to cite from it. Please check the document version below. Document Version Publisher's PDF, also known as Version of record Publication date: 2002 Link to publication in University of Groningen/UMCG research database Citation for published version (APA): Flache, A. (2002). Stochastic collusion and the power law of learning: a general reinforcement learning model of cooperation. Journal of Conflict Resolution, 46(5), 629-653. https://doi.org/10.1177/002200202236167 Copyright Other than for strictly personal use, it is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), unless the work is under an open content license (like Creative Commons). Take-down policy If you believe that this document breaches copyright please contact us providing details, and we will remove access to the work immediately and investigate your claim. Downloaded from the University of Groningen/UMCG research database (Pure): http://www.rug.nl/research/portal. For technical reasons the number of authors shown on this cover page is limited to 10 maximum. Download date: 25-09-2021 10.1177/002200202236167JOURNALFlache, Macy OF / CONFLICTSTOCHASTIC RESOLUTION COLLUSION AND THE POWERLAW Stochastic Collusion and the Power Law of Learning A GENERAL REINFORCEMENT LEARNING MODEL OF COOPERATION ANDREAS FLACHE Department of Sociology University of Groningen, the Netherlands MICHAEL W.
    [Show full text]
  • Theories of Commitment, Altruism and Reciprocity: Evidence from Linear Public Goods Games
    University of Pennsylvania ScholarlyCommons Operations, Information and Decisions Papers Wharton Faculty Research 4-2007 Theories of Commitment, Altruism and Reciprocity: Evidence From Linear Public Goods Games Rachel Croson University of Pennsylvania Follow this and additional works at: https://repository.upenn.edu/oid_papers Part of the Other Economics Commons, Other Sociology Commons, and the Theory, Knowledge and Science Commons Recommended Citation Croson, R. (2007). Theories of Commitment, Altruism and Reciprocity: Evidence From Linear Public Goods Games. Economic Inquiry, 45 (2), 199-216. http://dx.doi.org/10.1111/j.1465-7295.2006.00006.x This paper is posted at ScholarlyCommons. https://repository.upenn.edu/oid_papers/60 For more information, please contact [email protected]. Theories of Commitment, Altruism and Reciprocity: Evidence From Linear Public Goods Games Abstract Theories of commitment, altruism, and reciprocity have been invoked to explain and describe behavior in public goods and social dilemma situations. Commitment has been used to explain behaviors like water conservation and voting. Altruism has been applied to explain contributions to charities and intergenerational transfers and bequests. Reciprocity has been invoked to explain gift exchange and labor market decisions. This paper describes a set of experiments, which distinguish between these competing theories by testing their comparative statics predictions in a linear public goods setting. Results provide strong support for reciprocity theories over either theories of commitment or of altruism. Disciplines Other Economics | Other Sociology | Theory, Knowledge and Science This journal article is available at ScholarlyCommons: https://repository.upenn.edu/oid_papers/60 Theories of Commitment, Altruism and Reciprocity: Evidence from Linear Public Goods Games Rachel T.A.
    [Show full text]
  • The Psychology of Social Dilemmas: a Review ⇑ Paul A.M
    Organizational Behavior and Human Decision Processes 120 (2013) 125–141 Contents lists available at SciVerse ScienceDirect Organizational Behavior and Human Decision Processes journal homepage: www.elsevier.com/locate/obhdp The psychology of social dilemmas: A review ⇑ Paul A.M. Van Lange , Jeff Joireman, Craig D. Parks, Eric Van Dijk VU University Amsterdam, Department of Social and Organizational Psychology, Van der Boechorststraat 1, 1081 BT Amsterdam, The Netherlands article info abstract Article history: Broadly defined, social dilemmas involve a conflict between immediate self-interest and longer-term col- Received 22 December 2011 lective interests. These are challenging situations because acting in one’s immediate self-interest is Accepted 21 November 2012 tempting to everyone involved, even though everybody benefits from acting in the longer-term collective interest. As such, greater knowledge of social dilemmas should help us understand not only the theoret- ical puzzles of why people cooperate (or not) but also the ways in which cooperation in groups and orga- Accepted by: Eric van Dijk, Craig D. Parks and Paul A.M. van Lange nizations can be maintained or promoted. This article reviews different types of social dilemmas, highlights recent developments in the field (especially within psychology), and suggests some new ave- nues for future research. We illustrate that the field of social dilemma is growing and flourishing in terms Keywords: Social dilemma of theory, interdisciplinary collaboration, and applicability, producing insights that are novel, replicable, Human cooperation and applicable to many social situations where short-term self-interest is at odds with the long-term Trust interests of teams, organizations, or nations.
    [Show full text]
  • Social Traps
    Social Traps JOHN PLATT Mental Health Research Institute University of Michigan 1 A new area of study is the field that some of us the problem of competitive extermination of the are beginning to call social traps. The term refers last great whales. to situations in society that contain traps formally A converse type of situation might still be re- like a fish trap, where men or organizations or garded as a generalized trap, but perhaps is more whole societies get themselves started in some di- accurately called a countertrap. The considera- rection or some set of relationships that later tion of individual advantage prevents us from doing prove to be unpleasant or lethal and that they see something that might nevertheless be of great bene- no easy way to back out of or to avoid. fit to the group as a whole. It is, so to speak, a Two recent descriptions of traps of this kind social fence rather than a social trap. have already become widely quoted and discussed. A famous, or infamous, example of this kind The first is Garrett Hardin's (1968) article en- was the Kitty Genovese murder in New York City titled "The Tragedy of the Commons." The a few years ago, in which a girl was raped and title refers to situations like that of the Commons, killed in an areaway while more than 30 neighbors or public grassland, of the old New England vil- watched out the windows—and none of them called lages, where anyone could graze his cows freely. the police.
    [Show full text]
  • Societal Addiction Therapy: from Motivational Interviewing To
    Available online at www.sciencedirect.com ScienceDirect Societal addiction therapy: from motivational interviewing to Community Engaged Scenario Planning 1,* 2 1 1 Robert Costanza , Paul WB Atkins , Mitzi Bolton , Steve Cork , 3 4 1 Nicola J Grigg , Tim Kasser and Ida Kubiszewski Societies, like individuals, can become addicted to patterns of society still not taken appropriate action and changed its detrimental and unsustainable behavior. We can learn from one behavior accordingly? of the most successful therapies at the individual scale, motivational interviewing (MI). MI is based on engaging addicts In this paper, we draw an analogy between defensive in a positive discussion of their goals, motives, and futures. One denial at the society level and defensive denial from drug analogy to MI at the societal level is community engaged or alcohol addicts when warned about the long-run impli- scenario planning, which can engage entire communities in cations of their behaviors. It is well known in addiction building consensus about preferred alternative futures via therapy that it is rarely effective to directly confront public opinion surveys and forums. Effective therapies for addicts concerning the damage they are causing to them- societal addictions are possible, but require re-balancing effort selves and others. Rather than motivating addicts to away from only pointing out the dire consequences of current change, such interventions often result in a reactive behavior and toward also building a truly shared vision of a denial on the part
    [Show full text]
  • Greece: a Crisis in Two Level Governance
    Kevin Featherstone and Dimitris Papadimitriou Greece: a crisis in two level governance Book section (Accepted version) Original citation: Featherstone, Kevin and Papadimitriou. Dinan, Desmond, Nugent, Neil and Paterson, William E. eds. Greece: a crisis in two level governance. London, UK. Palgrave, 2017. pp. 223-252 © 2017 Palgrave This version available at: http://eprints.lse.ac.uk/84157/ Available in LSE Research Online: September 2017 LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website. This document is the author’s submitted version of the book section. There may be differences between this version and the published version. You are advised to consult the publisher’s version if you wish to cite from it. GREECE: A CRISIS IN TWO LEVEL GOVERNANCE Kevin Featherstone and Dimitris Papadimitriou 1. INTRODUCTION The Greek ‘crisis’ dominated the international headlines for much of the 2010-2015 period. It was the first and most acute case in the debt traumas that became evident in several Eurozone economies. The fact that it has so far entailed three bailouts and that it remains ongoing, with Greece the only Euro member not to have exited its ‘adjustment programme’, points to the extreme conditions of the case.
    [Show full text]
  • 1 a More General Model of Cooperation Based On
    A more general model of cooperation based on reinforcement learning: Alignment and Integration of the Bush-Mosteller and the Roth-Erev model* Paper to be presented at the Model To Model (M2M) Workshop, March 31st - April 1st, Marseille, France. Andreas Flache Department of Sociology, University of Groningen Grote Rozenstraat 31. 9712 TG Groningen, The Netherlands [email protected] Michael W. Macy Department of Sociology, Cornell University Ithaca N.Y. 14853 [email protected] This paper is a modified version of an earlier publication: Flache, A, M.W. Macy (2002). The Power Law of Learning. Journal of Conflict Resolution 46(5):629-653. This research was made possible by a fellowship of the Royal Netherlands Academy of Arts and Sciences to the first author and the U.S. National Science Foundation (SES-0079381) to the second author. We also thank two anonymous reviewers, Yoshimichi Sato, Douglas Heckathorn, and other members of the Janus Workshop on Backward-Looking Rationality at Cornell University for their helpful suggestions. Please direct correspondence to the first author. 1 Stochastic Collusion and the Power Law of Learning: Aligning and Integrating the Bush-Mosteller and the Roth-Erev Reinforcement Learning Models of Cooperation Abstract Analytical game theory has developed the Nash equilibrium as theoretical tool for the analysis of cooperation and conflicts in interdependent decision making. Indeterminacy and demanding rationality assumptions of the Nash equilibrium have led cognitive game theorists to explore learning-theoretic models of behavior. Two prominent examples are the Bush-Mosteller stochastic learning model and the Roth-Erev payoff-matching model. We align and integrate the two models as special cases of a General Reinforcement Learning Model.
    [Show full text]
  • Essays on Behavior Under Risk and Uncertainty
    Essays on Behavior under Risk and Uncertainty Inaugural-Dissertation zur Erlangung des Doktorgrades der Wirtschafts- und Sozialwissenschaftlichen Fakultät der Universität zu Köln 2012 vorgelegt von Dipl.-Vw. Julia Stauf aus Siegburg Referent: Prof. Dr. Axel Ockenfels Korreferent: Prof. Dr. Bernd Irlenbusch Tag der Promotion: 21. Januar 2013 Acknowledgements The writing of this dissertation has been one of the greatest intellectual and personal challenges I have faced. It would not have been completed without the support, motivation and guidance of the following persons. First and foremost, I thank my supervisor Axel Ockenfels for giving me the opportunity to work in an excellent academic environment and for guiding my research. His ideas, his knowledge and his commitment to the highest methodological standards inspired and challenged me and deepened my understanding of science. I thank my second supervisor Bernd Irlenbusch for his valuable comments and for reviewing my thesis. I thank my co-authors Gary Bolton, Christoph Feldhaus, Diemo Urbig and Utz Weitzel for fruitful discussions and for close collaboration in our joint research projects. I thank my present and former colleagues Sabrina Böwe, Olivier Bos, Felix Ebeling, Christoph Feldhaus, Vitali Gretschko, Lyuba Ilieva, Jos Jansen, Sebastian Lotz, Johannes Mans, Alex Rajko, Diemo Urbig and Peter Werner for the great working atmosphere, for countless discussions of academic, general and personal matters, and for making research fun. Beyond this, I thank Vitali and Alex for repeated corrections of my beliefs about my success probability. I thank our student helpers and in particular Markus Baumann, Andrea Fix, Gregor Schmitz and Johannes Wahlig for providing excellent research assistance.
    [Show full text]
  • My Work As an Institutional Economist Jan.31, 2008
    1 My Work As An Institutional Economist1 Jan.31, 2008 A. Allan Schmid Institutional Economics Theory Theory identifies relevant variables and the relationships among them. It facilitates the formation of hypotheses that can then be empirically tested.2 Theory tells us where to look. Good theory can also raise the level of public debate and join issues otherwise under obfuscation. My contribution to theory is in Property, Power and Public Choice (Schmid, 1987) and Conflict and Cooperation: Institutional and Behavioral Economics (Schmid 2004a).3 These books also contain a good deal of application and empirical references. A core idea is that you can’t design policy (institutions) if you do not know where human interdependence is coming from. It comes from inherent Situations of incompatible use, high exclusion cost, economies of scale, non-rival goods, etc. SSP theory suggests that the institutions (Structure) that affect Performance are different for each source of interdependence. For example, factor ownership that is instrumental with respect to incompatible use goods is not relevant for high exclusion cost goods. SSP theory is useful for both impact analysis (effect of alternative everyday commercial institutions) and for change analysis (effect of alternative rules for making rules, including constitutions). In change analysis, performance is measured as a change in the everyday rules. If this theory proves itself, it will be the first time a unified theory for institutional impact and change has been formulated. SSP is economic theory as much as any familiar neo-classical theory such as supply and demand and elasticity of demand. It may even be more useful in suggesting hypotheses subject to empirical testing.
    [Show full text]