Institutional & Behavioral Economics

Fall Semester, 2003, AEC-EC-RD 810

Prof. A. Allan Schmid.

Institutions, behavior, performance. Collective action, public choice, property rights, agency, transaction-information costs, behavioral theory of the firm-consumers-government, externalities, income distribution, order, evolution, learning, uncertainty, legitimation, altruism.

A. Schmid, Conflict & Cooperation: Insitutional & Behavioral Economics, Oxford: Blackwell, 2004.
D. North, Institutions, Institutional Change and Economic Performance, Cambridge, 1990.
A. Hirschman, Exit, Voice and Loyalty, Harvard, 1970.

J. Potts, The New Evolutionary Microeconomics, Elgar, 2000 (optional)

S. Keen, Debunking Economics, Pluto, 2001(optional)

A. Schmid, Study Notes, available on the web.



1. The Big Picture ---------------------------------------------------------------------------------Aug. 25

Framework for analysis of connection between choice-coordinating institutions and the performance of the economy. Alternatives range from the market with alternative property and contract rules to government enterprise and commands. Role of formal and informal institutions.

2. Property as Power and as Economizing--------------------------------------------------- Aug. 27

Institutions as constraints and as enabling. How paradigms affect what you see, what you question.

a. Schmid, I&BE, Ch. 1, "Introduction to Institutional and Behavioral Theory," (2002).

b. Eggertsson, Thrainn, Economic Behavior and Institutions. (1990), Ch. 1.

c. Rutherford, Malcolm, Institutions In Economics, (1994), Ch.1.

3. Power, Cost, and Political Economy--------------------------------------------------------- Sept. 3

Cost as a function of institutions. Demand as a function of income distribution.

a. Samuels, Warren, "The Legal-Economic Nexus," George Washington Law Review, 6:1556-1578 (1989).

b. Samuels and Schmid, "The Concept of Cost in Economics," in Samuels, Medema and Schmid, eds., The Economy As A Process of Valuation, (1997).

c. Keen, Debunking Economics, pp. 39-47 (esp. 42) and 72-77 (esp. 126 on power).

4. Domain of Institutional Analysis -----------------------------------------------------------------Sept.8

Open systems & the interdependence of the individual and society.

a. Hodgson, Geoffrey, "The Approach of Institutional Economics," Journal of Economic Literature, March, 1998, pp. 166-192.

b. Schmid, I&BE, Ch. 3, "Institutions and Organizations."

c. Potts, The New Evolutionary Microeconomics, 2000, Preface & Chs. 1 & 2. See review by Schmid in the Economic Record, March, 2003.

d. Simon, Herbert, "The Failures of Armchair Economics," Challenge, Nov.-Dec. 1986, pp. 18-25. (Optional for fun.)


Variables and relationships identified by theory. How do characteristics of goods and people affect human interdependence and the possibility of Alpha's choices to affect Beta? How do alternative rights shape the distribution of the consequences of this interdependence?

5. Behavioral Concepts: Learning, Reinforcement and the Environment ---------- Sept. 10

a. Schmid, I&BE, Ch. 2, "Behavioral Economics."

b. Margolis, Howard, Patterns, Thinking and Cognition, (1987) excerpts. (Optional for fun.)

c. Gazzaniga, Michael, The Social Brain, (1985) pp. 67-80. (Optional for fun.)

6. Cognition and Choice---------------------------------------------------------- Sept. 15

a. Elster, Jon. "Emotions and Economic Theory," J. Of Economic Literature, March, 1998, pp. 47-74. (Available from JSTOR)

b. Earl, Peter, The Economic Imagination, (1983) Ch. 4 "Alternative Behavioral Theories of Choice," pp. 87-88 only, on lexicographic choice.

c. Potts, The New Evolutionary Microeconomics, recall section 2.4.3, "Critique of Agent Models."

d. Allais Paradox example (to be distributed).

7. Behavioral Economics --------------------------------------------------------------------Sept. 17

a. Arrow, Kenneth, "Rationality of Self and Others in an Economic System," in Hogarth and Reder, eds., Rational Choice (1987).

b. Simon, Herbert, "Rationality in Psychology and Economics," in Hogarth and Reder, eds. Rational Choice (1987).

c. Sen, A. "Rational Fools: A Critique of the Behavioral Foundations of Economic Theory," Ch. 4. in his Choice, Welfare and Measurement, (1982).

8. Incompatible Use and Exclusion Cost-----------------------------------------------Sept. 22

a. Schmid, I&BE, Ch. 4, Sections 4.1, 4.2 & 4.3, "Incompatible Use" and "Exclusion Costs."

b. Olson, Mancur, The Logic of Collective Action, (1965) Ch. 1.

c. Hirschman, A. O., Getting Ahead Collectively, (1984) pp. 42-49. (Optional for fun.)

d. Dawes, Robyn, "Cooperation for the Benefit of Us--Not Me or My Conscience," in J. Mansbridge, ed. Beyond Self Interest, (1990). (Optional for fun.)

 9. Behavior that Depends on Behavior of Others  -----------------------------------------Sept. 24

a. Schelling, T., Micromotives and Macrobehavior. (1978), Chs.1, 2, and 7.

10. Prisoner's Dilemma -----------------------------------------------------------------------------Sept. 29

a. Schmid, Property, Power, and Public Choice, (1987) Ch. 8, pp. 172-9, "Social Traps". (on course web page)

b. Goetz, Charles, Law and Economics, Ch. 1, "Analyzing Human Choice Under Alternative Rules," pp. 1-37 only (Prisoner's Dilemma and Chicken Games).

c. Review of Axelrod, The Evolution of Cooperation, and Frank, Passions Within Reason, in Harvard Bus. Review, May-June, 1989 pp. 29-34.

d. Platt, J. "Social Traps," American Psychologist, August, 1973, pp. 641-651. (Optional for fun.)

11. Increasing Returns ------------------- ----------------------------------------------------------Oct. 1

a. Schmid, I&BE, Ch. 4, Section 4.5, "Economies of Scale."

b. Arthur, Brian, "Positive Feedbacks in the Economy," Scientific American, Feb. 1990, 92-99.

c. Skott, Peter, "Cumulative Causation," in Elgar Companion to Institutional and Evolutionary Economics, G. Hodgson, ed. (1994) pp. 119-22.

12. Joint-Supply Goods (Marginal cost = zero) ---------------------------------------------------Oct. 6

a. Schmid, I&BE, Ch. 4, Section 4.4, "Joint-Supply Goods."

13. Transaction Costs------------------------------------------------------------------- Oct. 8

a. Schmid, I&BE, Ch. 4, section 4.7, "Transaction Costs." (Omit 4.7.4 & 4.7.5)

b. Williamson, Oliver. "The Lens of Contract," American Economic Review, 92(2):438-43 (2002).

14. Uncertainty and Information Processing Costs---------------------------------------------Oct. 13

a. Schmid, I&BE, section 4.7.4, "Fundamental Uncertainty," and 4.7.5, "Evolutionary & Competence Based Theory of the Firm."

b. Potts, , Ch 7, "Theory of Expectations."

c. Littlechild, S. "Three Types of Market Process," Economics As A Process, Langlois, ed. (1989). (Optional)

15. Organizations --------------------------------------------------------------------------------------Oct. 15

a. Simon, H. "Organizations and Markets," J. Econ. Perspectives, 5:25-44 (1991). (Available from JSTOR)

b. Hodgson, G. "Evolutionary & Competence-Based Theories of the Firm," Evolution and Institutions, (1999), 247-275.

c. Schmid, I&BE, Ch. 3, "Institutions and Organizations," re-read 3.3 and section 4.7.5, "Competence Based Theory of the Firm."

16. Institutional Change (1) ------------------------------------------------------------------------Oct. 20

a. Schmid, I&BE, Ch 11, "Institutional Change Analysis."

b. Potts, The New Evolutionary Microeconomics, Ch. 4, "Systems Theory and Complexity." (optional)

c. Samuels, Schmid and Shaffer, "An Evolutionary Approach to Law and Economics," pp. 96-99, in R. England, ed. Evolutionary Concepts in Contemporary Economics, (1994). (optional)

17. Institutional Change (2) ------------------------------------------------------------------------Oct. 22

a. North, D. Institutions, Institutional Change and Economic Performance, (1990)


18. Paradigm Restated  ------------- --------------------------------------      Exam Oct. 27

a. Schmid, I&BE Ch12, "Recapitulation."

b. "Forty Concepts:" and "Paradigm Comparisons" (on the web)

c. "SSP Impact Methodology" journal file. (on the web)

d. A good review vehicle is Ch. 2 in Samuels and Schmid, eds. Law and Economics. (optional)


19. Exit, Voice, or Loyalty --------------------------------------------------------------------Oct. 29

a. Hirschman, Albert, Exit, Voice and Loyalty, (1970) pp. 1-126.

b. Recall I&BE, Table 4.5 on exit, voice and loyalty and Table 4.13, "Hirschman & SSP."

20. Normative Rules for Choice Among Alternative Institutions---------------------Nov. 3

a. Schmid, Property, Power and Public Choice (1987) Ch. 11, "Rules for Choice." (on course web page)

b. Bromley, D. "Rethinking Markets," Amer. J. of Agr. Econ., 79(5):1383-1393 (1997)

c. Calabresi, Guido, Ideals, Beliefs, Attitudes and the Law, (1985) pp. 1-2, Ch. 3, "The Beliefs of a Reasonable Person," and p. 69 and pp. 84-85.

d. Breimyer, Harold, "Government 'Intervention': A Deceptive Label," Choices, 2nd Quarter 1991, p. 3. (Optional for fun.)

21. "Is There a Better 'ole To Go To"? ----------------------------------------------------Nov. 5

a. Robinson, Joan, Economic Philosophy, Ch. VI, "What Are the Rules of the Game," pp.124-147.

b. Singer, Joseph, "Legal Realism Now," California Law Review, (1988) 76:465-544. (Excerpt)

c. Bromley, Dan, (1989) Economic Interests and Institutions, Ch. 1 & pp. 77-79 & 143-46.

d. Schmid, I&BE, Ch. 3, "Institutions and Organizations," Section 3.5, "Social Choice."


  22. Experimental Economics ------------------------------------------------------------------Nov. 10

a. Schmid, I&BE, "Empirical Methods," 5.2.

b. Ledyard, J. "Public Goods: A Survey of Experimental Research," in J. Kagel & A. Roth, Handbook of Experimental Economics, Ch. 2, (1995).

23. Case Studies ----------------------------------------------------------------------------------Nov. 12

Schmid, I&BE, 5.3. And one of the following:

a. Ostrom, Elinor, Larry Schroeder and Susan Wynne. Institutional Incentives and Sustainable Development, (1993) pp. 35-6, 43-4, 56-57, 68-70, 87-88; & 177-181, 209-10, and pp. 225-29.

b. Fukuyama, F. Trust, Part II: Low Trust Societies & the Paradox of Family Values, Ch. 8 (China). (1995).

c. Greif, Avner. "Institutions and Commitment in International Trade: Lessons from the Commercial Revolution," American Economic Rev. 82:(2)128-133 (1992). (Available from JSTOR)

24. Econometric Studies -------------------------------------------------------------------------Nov. 17

a. Schmid, I&BE, 5.4.

b. Schmid, "Different Heterodox Economic Theories: Different Empirical Results"

# Note assignment.--------------------------------------- Also, Term Paper outline due.

25. Market Institutions: Law and Economics ------------------------------------------------Nov. 19

Schmid, I&BE, Chapter 6, "Markets" and one of the following:

a. DeSoto, Hernando, The Other Path, Ch. 5, "The Costs and Importance of the Law," esp. pp. 158-187.

b. Schmid and Robison, "Applications of Social Capital Theory," J. Agr. and Applied Econ. 27(1):59-66 (1995).

c. Pencavel, John, and Ben Craig, "The Empirical Performance of Orthodox Models of the Firm: Conventional Firms and Worker Cooperatives," Journal of Political Economy, 102(3):718-44 (1994). (Available from JSTOR)

d. Olson, Mancur, "Why Some Nations are Rich, and Others Poor," J. Econ. Perspectives, 19(2):3-24 (1996). Available from JSTOR)

26. Labor Institutions ------------------------------------------------------------------------------Nov. 24

Schmid, I&BE, Chapter 9, Labor Institutions." And one of the following:

a. Thurow, Lester, Dangerous Currents (1983), Ch. 7, "The Labor Market".

b. Williamson, Oliver, Economic Institutions of Capitalism, Ch. 9, "The Organization of Work."

c. Bergmann, Barbara, (1989) "Does the Market for Women's Labor Need Fixing?" J. of Econ. Perspectives, 3 (Winter):43-60.(Available from JSTOR)

27. Technology Institutions---------------------------------------------------------------------Nov. 27

Schmid, I&BE, Chapter 8, "Technology: Growth & Institutions." And one of the following:

a. Ruttan, Vernon, and Yujiro Hayami, "Toward a Theory of Induced Institutional Innovation" Journal of Development Studies, pp. 203-23 (1984).

b. Schmid, "Biotechnology, Plant Variety Protection, and Changing Property Institutions in Agriculture," North Central J. of Agr. Econ. 7:129-38 (1987).

c. Dosi, Giovanni, and Luigi Orsenigo, "Coordination and Transformation," In Dosi, eds., Technical Change and Economic Theory, 1988, pp. 13-37.

28. Political Institutions: Constitutional Economics --------------------------------------------Dec. 1

a. Schmid, I&BE, Chapter 10, "Political institutions."

b. Sandmo, A.,"Buchanan On Political Economy," J. of Econ. Literature, 28(1):50-65, March, 1990 (optional).


30. Can the Timid Get There From Here? ---------------------------------------------------Dec. 3

a. Schmid, Allan, "Broadening Capital Ownership: The Credit System as a Locus of Power," in Alperovitz and Skurski, eds., American Economic Policy, (1984).

b. Schmid, I&BE, Ch. 7, "Macro-economic Institutions." (optional)

31. Final Exam Period, Friday, December 12, 7:45 a.m.

Oral Presentation of Term Papers to Class. Distribute Summaries of Abstract. Term paper due on last day of semester classes (Friday).


Course Homepage -

Institutional & Behavioral Economics Homepage--

If you have any questions or comments, please email

phone (517) 355-2266