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Economic Institutions Modeling

Economic Institutions Modeling. Institutional Design Systematisation of Institutions Distribution of Institutions Measurement of Institutions Evolution of Institutions Prof.Dr. Evgeny Popov. Problem of Investigation. The organisational routines R. Nelson - S. Winter

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Economic Institutions Modeling

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  1. Economic Institutions Modeling Institutional Design Systematisation of Institutions Distribution of Institutions Measurement of Institutions Evolution of Institutions Prof.Dr. Evgeny Popov

  2. Problem of Investigation • The organisational routines R. Nelson - S. Winter • The transaction cost theory of R. Coase • D. North’s concept of economic institutions • E. Ostrom’s institutional design, but no study systematises the principles and ideas of institutional level modelling into a single theory. The aim of this study is to develop an institutional theory of modelling – a system of scientific principles and ideas that generalises the experience and reflects the laws of the development of society within the framework of institutional economic thinking.

  3. The Logic of Problem Solution The following stages of the modelling approach can be consistently included: systematisation, formalisation, classification, distribution and measurement of economic institutions. Economic models include such formal constructions, in which input and output models can be isolated, as well as the presence of a control parameter. By economic institutions, in the interpretation of Nobel Prizewinner D. North we refer to the established norms of interaction between economic agents with presence of controlling this norms.

  4. Nobel Prizes for Institutional Economics Nobel Prize winner D. North (1996)

  5. 1. Institutional Design (1) • The winner of the 2009 Nobel Economics Prize, E. Ostrom examined practices in situations where the state is not able to create institutional arrangements or get them to fully comply with formal rules. • The sustainable existence of Ostrom’s common-pool resources is possible only in cases where the design of the system for the operation of shared resources corresponds to a specific set of the number of principles.

  6. Nobel Prizes for Institutional Economics O. Williamson and E. Ostrom «Theory of Economic Organizations» – Nobel Prize winners (2009)

  7. 1. Institutional Design (2) Design principles of E. Ostrom: • presence of clear group boundaries, • clear specification of local resource-use rules, • involvement of group members in the process of establishment and modification of rules, • participation in the monitoring of compliance with the rules, • presence of conflict resolution mechanisms, • minimal recognition of the right to self-organisation on the part of the authorities.

  8. 1. Institutional Design (3) The first scientific principle of the theory of institutional modelling should include a provision stating that the design of economic institutions is based on the implementation of specific formation rulesspecifying resource use similar to E. Ostrom’s principles of institutional design.

  9. 1. Institutional Design (4)

  10. 1. Institutional Design (5) The first scientific idea of the institutional modelling theory consists in the active development of business models for the real economy based on the principles of institutional design, for example for the generation of new knowledge.

  11. 2.Systematisation of Institutions (1) С Сm Ch Cf MarketHybrid Firm А Williamson O.E. A Comparison of Alternative Approaches to Economic Organization //Journal of Institutional and Theoretical Economics. 1990. Vol. 146. N 1. P. 61-71.

  12. 2.Systematisation of Institutions (2) P O S C RI M G K L A Popov E.V. Market Potential of the Firm //International Advances in Economic Research. 2008. Vol. 14. No. 4. P. 474-475.

  13. 2. Systematisation of Institutions (3) The second scientific principle of the theory of institutional modelling: The systematisation of economic institutions should be based on defined system performance criteria, releasing various functions of institutions, similar to o. Williamson differences of institutional functions for market, hybrids and firms or elements of the market potential of the firm.

  14. 2. Systematisation of Institutions (4) Exogenous institutions KnIMaPr PrRFa Employee Firm SocGInfSearch MeOpMarPotOrgRout Endogenous institutions Popov E.V. Transactions & Institutions //Montenegrin Journal of Economics. 2012. No. 2. P.115-124. СЭ

  15. 2. Systematisation of Institutions (5) The second scientific idea of the theory of institutional modelling consists in the possibility of classifying economic institutions according to the coordinates that distinguish exogenous or endogenous institutions and whether ownership is concentrated in individuals or groups of individuals

  16. 2. Systematisation of Institutions (6) Practical use: • Author method of management forendogenous opportunismbetween principals and agents • Method of management for institutions of sensor branding • Method of management for institutions of green economics Popov E.V. and Simonova V.L. Forms of Opportunism between Principals and Agents //International Advances in Economic Research. 2006. V.12. N 1. P. 115-123.

  17. 3. Distribution of Institutions (1) The distribution model for economic institutes can be presented in the form of a hierarchy of rules according to J. Buchanan. Buchanan, who won the Nobel Prize in Economics in 1986, was not representative of classical institutionalism. However, his researches, devoted to methodological individualism and the evaluation of policy as a process of exchange, largely relied on the institutional analysis of economic activity

  18. Nobel Prizes for Institutional Economics J. Buchanan “Constitution of Economic Policy”Nobel Prize winner(1986)

  19. 3. Distribution of Institutions (2) The third principle of institutional modelling theory consists in the modelling of the distribution of economic institutions being possible on the basis of functional data content hierarchy of established norms of interaction between economic agents, resembling Buchanan’s distribution of politico-economic institutions.

  20. 3. Distribution of Institutions (3) The model of distribution of economic institutions in the form of a hierarchical structure consists of an institutional atlas which involve a summary classification of institutions, which combines several types of systematisation of these institutions according to various criteria. • The hierarchical systematisation of institutions is possible according to the following criteria: place of origin, areas of expertise, functions and areas of activity. Popov E.V. Institutional Atlas //Atlantic Economic Journal. 2011. Vol. 39. N 4. P. 445-446.

  21. 3. Distribution of Institutions (4) The third scientific idea of institutional theory of modelling consists in the distribution of hierarchical institutions be capable of representation in the form of an institutional atlas, structuring institutions according to the function of fulfilling norms of interaction between economic agents.

  22. 3. Distribution of Institutions (5) Practical use: • Author method of determination of institutional dysfunctions by the comparison the theoretical (possible) institutional atlas and its real implementation

  23. 4. Measurement of Institutions (1) “The Nature of the Firm”, R. Coase wrote: “In a system based on competition, there must be some optimal level of planning. This is due to the fact that the company, being a small planned association, could only continue to exist in the case of fulfilment of the coordinating functions at a lower cost than those that are required in the implementation of co-ordination by market transactions, and if these costs are lower than those costs in other firms.”. Coase R.H. The Nature of the Firm //Economica. N.S. 1937. Vol. 4. N 10. p. 386-405.

  24. Nobel Prizes for Institutional Economics Ronald Coase“Institutional Structure of Production” – Nobel Prize winner(1991)

  25. 4. Measurement of Institutions (2) The fourth principle of the theory of institutional modelling is that the institutional structure of the economic system can be measured by the cost of transactions in the formation and maintenance of given economic institutions, in like manner to Coase’s assessment of transaction costs of institutions of the firm.

  26. 4. Measurement of Institutions (3) K. Arrow defined transaction costs as the operation costs of the economic system. Arrow compared the action of transaction costs in the economy with the effect of friction in physics. D. North: transaction costs “consist of the costs of assessing the useful properties of the object of exchange and the costs of ensuring rights and coercion to comply with them.” Arrow K.J. Capital-Labor Submission and Economic Efficiency //Review of Economics and Statistics. 1961. Vol. 43. P. 56-70. North D.C. Institutions //Journal of Economic Perspectives. 1991. No 5. p. 97-112.

  27. 4. Measurement of Institutions (4) Based on the representations of K. Arrow and D. North, we assume that the economic valuation of the institute consists in the transaction costs relating to the formation and maintenance of the established norms of interaction between economic agents. This position can be the formulation of the fourth scientific idea of the theory of institutional modelling.

  28. 4. Measurement of Institutions (5) • Т. Eggertsson:“Transaction costs are directly proportional to the number of economic agents entering into contracts with each other”. • R. Matthews: “Transaction costs are inversely proportional to the number of contracts and established norms that ensure the implementation of these contracts”. Eggertsson T. Economic Behaviour and Institutions. M.: Delo, 2001. p. 29. Matthews R.C.O. The Economics of Institutions and Sources of Growth //Economic Journal. 1986. Vol. 96. No. 12. P. 903-910.

  29. 4. Transaction Function С = B Nλ / (Fμ+ Iε) С – transaction cost of the firm N –quantity of agents (counterparties)who has contracts with this firm F – quantity of formal institutions I – quantity of informal institutions λ,μ,ε – elastic coefficientsfor using agents, formal and informal institutions Popov E.V. Transaction Function //International Advances in Economic Research. 2008. Vol. 14. N 4. P. 474-475.

  30. 4. Measurement of Institutions (6) Practical use • Transaction Theory of Economic Institutions (incl. Transaction Function) Popov E.V. Transaction Estimation of Institutions //Advances in Economics and Business. 2014. V. 2. N 1. P. 58-64. • Estimation of publishing activity and scientific mobility of academic organizations Popov E.V., Vlasov M.V. Dependence of Research Productivity on Transaction Costs //International Journal of Business and Management. 2013. Vol. 8. No. 2. P. 78-85.

  31. 4. Measurement of Institutions (7) π(Q, Ci) = R(Q, Ci) – G(Q) – Ci TF = f(π; Ci) max TF = max f {R(Q, Ci) – G(Q) – Ci; Сi} 0 ≤ ∂R/∂Ci ≤ 1 Popov E.V., Konovalov A.A. Institutional Effects Estimation in the Sphere of Economical Information //Montenegrin Journal of Economics. 2007. No. 5. P. 59-66.

  32. 4. Measurement of Institutions (8) R, ∂R/∂Ci R I II III ∂R/∂Ci 0 t

  33. 5. Evolution of Institutions (1) The fifth principle of institutional modelling theory comprises a simulation of the possible evolution of institutions on the basis of a formalisation of resource potential and existing institutional infrastructure of the economic system, similar to the modelling approach of L. Hurwics theory of economic mechanism.

  34. Nobel Prizes for Institutional Economics Leo Hurwicz “Theory of Economic Mechanisms” – Nobel Prize winner(2007)

  35. 5. Evolution of Institutions (2) The fifth scientific idea of the theory of institutional modelling consists in the fact that simulation of the evolution of economic institutions is possible by evaluating the impact of exogenous and endogenous factors on the dynamics of changes in these institutions.

  36. 5. Evolution of Institutions (3) Dependence of quantity of firms N from the phases F of life cycles due to evolution of family institutions (dotted line – married employees less than 50 % of all workers)

  37. 5. Evolution of Institutions (4) Dependences of quantity of firmsN from the time of firm on market (years) due to the institution of dress-code (dotted line – no rules, continues line – hash rules)

  38. 5. Evolution of Institutions (5) Practical use: • R. Nelson, S. Winter – the model of time dependence for transaction cost Nelson R.R., Winter S.G. An Evolutionary Theory of Economic Change. Cambridge, MA: Harvard University Press, 1982. • Author diffusion model of transaction cost dynamics Popov E.V. Diffusion Model of Transaction Cost Dynamics //Journal of Business and Economics. 2011. Vol. 2. No. 3. P. 222-229.

  39. 5. Author Diffusion Model С = С (х,t) ∂C / ∂t = D ( ∂2C / ∂x2 ) ∞ C(x,t) =Σ(2C0/πn)Sin(πnx/d)exp(-π2n2Dt/d2) n = 1

  40. 5. Life Cycle of Economic Institution Q Qmax 0 t1 t2 t3 t Popov E.V. Theory of Evolution of Mini-Economic Institutions //Montenegrin Journal of Economics. 2006. Vol. 2. No. 3. P. 57-73.

  41. 5. Transaction Cost Dynamics С 0 t1 t2 t3 t

  42. 5. Metal Production of the Verh-Isetsky Metallurgical Plant Q, тн 200 100 1974 1980 1985 1990 t

  43. 5. Transaction Cost of Verh-Isetsky Metallurgical Plant C,т.р. 100 50 1974 1980 1985 1990 t

  44. 5. Various Mechanisms on Institutional Evolution ∂Ce/∂t = De ( ∂2Ce / ∂x2 ) – k1Ce + k2Ci ∂Ci/∂t = Di ( ∂2Ci / ∂x2 ) – k2Ci + k1Ce De, Di – “external coefficients” k1, k2 – “risk shares”

  45. 5. Institute of Diffusion of Technological Knowledge

  46. 5. Risk Shares for Application of Institution of New Knowledge

  47. Economic Institutions Modeling Institutions Modelingis the real instrument of investigation for rules of society development in the framework of modern economic theory Thank for your attention!

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