Journal File A. Allan Schmid , October 26, 1999


What is creating the interdependence in Heiner? The C-D Gap is not HIC in the usual sense. It is not missing information, but rather the complexity of it in a calculation of advantage. The probability of making a calculation mistake leads people to adopt SOP's

Heiner's theory identifies structural variables which are quite different from Williamson (markets vs. hierarchy) or North (Magna Carta, weights and measures, commerce clause and third party contract enforcement). His institutional variables are informal (not legal). They are personal and firm level SOP's. Some call it corporate culture.

Heiner's theory works very well for consumer choice. Consumers could do more (not all) calculation about the features of 10,000 items in the grocery store relative to prices, but the probability of mistakes leads them to adopt some simple rules like buy what you bought yesterday or what is on sale. The manufacturers of course want to break consumers' routines and get them to try something new. For firms, the government might want to break their routines with respect to disposal of waste products and hope that they might find that some recyling is actually profitable. This would be an example of Leibenstein's X-inefficiency, where firms are not taking advantage of all profitable opportunities. But of course they have neither time nor calculating power to see and consider them all.

Heiner says he has a better model of the law of demand. The curve is negative not because of changed price tangency with utility functions, but because the only way to reduce the C-D Gap created by a price increase is to buy less of the product (avoid the probability of mistakes). "A higher price requires purchasing behavior to be more reliable, which can be achieved only by reducing the probability of purchase." 580. Consumers especially do not react to small changes in price because "a person can increase the reliability of his detection behavior only by being more cautious in detecting signals." 579 Given imprecise preferences, one can't be sure that a reallocation of spending will increase welfare and thus faint signals are rejected. (Recall Arrow who said that many theories are consistent with a constrained budget.)