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71 Cards in this Set
- Front
- Back
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What is an institution?
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A humanly devised arrangement that may be formal or informal
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What are the three characteristics of an institution?
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(1) Place constraints on behavior
(2) Provide a structure for activities (3) May or may not be efficient |
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When are the three times that you need formal institutions?
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(1) Many people as opposed to few
(2) Lack of complete or symmetric information (or agreement) (3) Lack of repetition in the arrangements or exchanges |
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What are the characteristics of formal institutions?
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Institutions that are written down and established by authoritative bodies. They are consciously determined.
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What are the characteristics of informal institutions?
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- Not written down
- Include rules that are in everyone's interest to obey - Include customs, traditions, norms - Socially transmitted, part of the culture |
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Why do we need formal institutions if there are many people (as opposed to a few)?
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Small groups (e.g., families) typically have informal norms and practices already
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Why do we need formal institutions if there is a lack of complete and symmetric information?
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The information about the items being exchanged, the terms of the agreement, and the persons involved need to be known by all
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Why do we need formal institutions if there is a lack of repetition?
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In repetitive arrangements, the parties involved have a stake in preserving and perpetuating the arrangement.
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What is a Bill of Exchange?
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A written order by the drawer (person or business) to the drawee (another person or business - a bank) to pay the beneficiary of the bill of exchange a specific sum on a specific future date.
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Inefficiency implies what two things?
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(1) Waste
(2) Mere redistribution but no growth |
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Differences between efficient and inefficient institutions?
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Institutions need not be efficient - Efficiency implies that when people or organizations act in their own interests there will be increases in the overall output. Inefficient institutions do not produce increases in output.
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Institutional change is what?
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Path-dependent - institutions tend to be self-reinforcing.
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An institution (convention, norm, standard) that is established early can become what?
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Entrenched.
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What is the relationship between organizations & institutions?
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Organizations affect institutions and vice versa.
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What is meant by fundamental factors?
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The things that cannot be controlled: geography, presence of natural resources, ethnolinguistic diversity
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Relationship between institutions and economic growth
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They both cause the other.
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Positive correlation between what two things?
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Strength of formal institutions and economic levels/growth.
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Negative correlation between what two things?
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Strength of formal institutions and volatility.
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What is a property right?
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Exclusive authority to determine how a resource is used.
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What are the four distinct rights of property ownership?
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(1) Consume, use or benefit from
(2) Transfer (or sell) (3) Mortgage it (borrow against it) (4) Exclude others from it |
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What is the relationship between property rights and control?
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They are related but distinct - Ex: A thief does not have the legal rights to something he stole
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Property rights are limited or unlimited?
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They may be limited. For example: it may be illegal to own certain types of property, or to use property in certain ways.
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What are the three categories of property?
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(1) Physical Property
(2) Financial Property (3) Intellectual Property |
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What is the difference between real and personal property?
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Real property is generally immovable (e.g., land) and personal property is movable (e.g., machines, ships)
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What are two traits of financial property?
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(1) No physical existence
(2) Typically takes the form of claims on the cash flows generated from something |
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What are two traits of intellectual property?
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(1) No (or minor) physical existence
(2) Based on knowledge and ideas |
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What is a key characteristic of property and why is it important?
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Property is scarce - makes it worthwhile to incur the cost to devise property rights
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Can property rights be perfectly specified and enforced?
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No - Can't foresee every outcome and necessitates an arrangement (institution) to settle disputes about ownership and control
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What is the difference between common law and code law?
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Code law is where everything is written down, common law allows for courts to set a precedent
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How long can property rights be specified for?
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Cannot be specified for the indefinitely distant future
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Do property rights need to be efficient?
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No, however inefficient property rights impede growth.
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When are property rights created?
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When it becomes worthwhile to incur the cost of devising them.
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What three reasons prevent inefficient property rights from becoming efficient?
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(1) Enforcement costs of efficient institutions may be too high (e.g., pay pirates off instead of creating a navy)
(2) Total costs to change is high (e.g., moving the US to the metric system) (3) There are winners vs. losers - Those with the power to change the property rights don't have incentive to do so (e.g., the Spanish government taxing sheep). |
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Why are property rights essential for economic growth?
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Without them there is no incentive to invest or improve the resources. Investment is a necessary component of economic growth.
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Investment requires what two things from property rights?
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(1) Existence
(2) Stability |
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What two general conditions impede the development of property rights?
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(1) No incentives - the costs to create exceed the benefits to any one group.
(2) Enforcement - Inability to identify participants and compel them to bear their share of the costs. |
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What are the four forms of property ownership?
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(1) Open Access - No specific property rights (e.g., Linux)
(2) Common Property - No owner has property rights (e.g., pasture for sheep) (3) State Property - Government holds the property rights (e.g., military base) (4) Private Ownership - Owner(s) have the property rights (e.g., house) |
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What is the "tragedy of the commons"
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Everyone has an incentive to overuse the shared resource
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For state property, what can the persons designated to control it NOT do?
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Transfer/convert it, or gain from increases on the property's value.
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What are the three main ways to own property?
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(1) Proprietorship
(2) Partnership (3) Corporation |
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What is the definition of a Proprietorship?
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No meaningful institutional distinction between the owner and the enterprise
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What is the definition of a Partnership?
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Acts like a Proprietorship with multiple proprietors
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What is the definition of a Corporation?
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The enterprise is institutionally separated from its owners.
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What are the seven (7) components of a Corporation?
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(1) Ability to contract
(2) Limited Liability (3) Taxation (4) Requirement to comply with laws and regulations (5) Bankruptcy (6) Indefinite duration (7) Ability to trade shares |
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What does limited liability do in terms of risk?
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Allows the owners to be more risky because they do not have to bear the cost.
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What is the priority of claims on the outcome of an enterprise
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Debt is paid first, then equity.
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How does bankruptcy enforce the property rights of creditors as whole?
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(1) Prevents selected creditors from just seizing the assets
(2) Allows for reorganization versus liquidation |
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Dispersed ownership does what in relation to monitoring managers?
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No one owner has incentive to monitor the managers.
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Concentrated ownership does what in relation to monitoring managers?
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Controlling shareholders have the incentive and power to monitor the managers.
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What percentage of equity of stock must a dominant shareholder have?
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20%
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What are the four institutions that protect non-controlling shareholders?
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(1) Boards of Directors - Required to act on behalf of all shareholders
(2) Rights to sell shares, sue officers/directors, and vote (3) Disclosure requirements - Provide ready access to information (4) Enforcement of existing institutional requirements |
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What are the four requirements of a patent?
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(1) New - Not around more than one year prior to application
(2) Useful - Has a foreseen use (3) Non-Obvious (4) Man-made - Can't be a mere discovery of natural phenomenon |
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What is a patent?
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Protects inventions over processes, machines, manufactured items, chemical compounds, and plants for 20 years.
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What does a patent grant?
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Right to exclude others from using, making, or selling the invention in exchange for publicly disclosing the details of the invention.
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What is a copyright?
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Protects the right to control and duplicate creative expressions (e.g., work of art, music, movies) for 70 years
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What is a trademark?
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Protects "marks" (e.g., brands, logos, slogans, product designs, packaging) for unlimited life, provided the are used in commerce.
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What is a trade secret?
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Information (e.g., formula) not generally known and is subject to reasonable efforts to maintain secrecy.
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What are the two ways to use intellectual property?
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(1) Licensing - Agreement to make, use, and sell the property
(2) Open Source - Remove exclusivity rights. |
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What are the four differences between intellectual property and physical property?
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(1) Non-rivalrous: IP is not depleted or destroyed by use
(2) IP has low or no marginal cost of production (3) IP is less capable of being defended and policed (4) New ideas invariably build on older ideas |
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What are the four cost-benefit considerations of IP?
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1 - Capture costs and rent dissipation from non-exclusivity
2 - Social costs 3 - Reduced investment 4 - Exchange and policing costs |
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What are capture costs?
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Costs in the current period
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What are dissipation costs?
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Costs in future periods
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What are two ways that IP differs from physical property in terms of capture costs and rent dissipation?
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(1) There are no capture or dissipation costs associated with IP
(2) The use of IP actually increases the value of the IP |
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What are the two (2) Social costs of exclusivity for IP?
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(1) The costs of excluding people from access to or using the resource may create even higher costs (e.g., illness, death, and suffering)
(2) In these situations, higher costs are imposed on those who try to enforce their IP rights. |
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What is a key problem for IP?
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There is underinvestment because it is difficult to exclude others from it. Need to be balanced between being too loose and too strict when enforcing exclusion.
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Enforcement of IP is rights is more complex for what four reasons?
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(1) IP is easily accessible and easily shared (piracy)
(2) Culture differences with respect to sharing (3) Consumers don't see buying counterfeit goods as a crime (4) Policing efforts are ongoing, expensive, difficult, and ineffective |
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What is enforcement?
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Enforcement is the mechanism which provides assurance that institutions intended to constrain behavior will in fact constrain it.
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What are the three ways to measure enforcement?
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(1) Inputs: Resources available to enforce (staff, budget)
(2) Powers: What actions that the enforcement body can take (3) Outputs: Number of enforcement items |
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What are five (5) common acts of corruption?
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(1) Fraud
(2) Embezzlement (3) Tunneling (4) Nepotism (5) Bribery |
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Corruption impedes economic growth in what two ways?
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(1) Increases search, negotiation, and enforcement costs, which reduces activity
(2) Higher uncertainty - No assurance that the next transaction will go the same |
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What are four ways to decrease corruption?
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(1) Pay public officials more
(2) Increase competition among firms (prices get closer to MC) (3) Reduce bureaucratic power (4) Create more and better enforcement |
