1 New Institutional Economics: Implications for Rural Development Research and Extension Programs James N. Barnes, Ph.D. Assistant Professor of Rural Development Department of Agricultural Economics Oklahoma State University

2 The Journey Ahead ►What Is New Institutional Economics (NIE)? ► NIE and Theories of the Firm ►Implications for Rural Development Research ►Implications for Rural Development Extension Programs ►Concluding Remarks

3 New Institutional Economics: Some Attributes Klein (2000, p. 1) has defined NIE as: “…an interdisciplinary enterprise combining economics, law, organization theory, political science, sociology and anthropology to understand the institutions of social, political and commercial life.” NIE can be broadly divided into the study of the institutional environment and institutional arrangements given positive transaction costs. ► ► ► ► NIE is similar to ‘Institutional Economics’ (Veblen, Commons) NIE is dissimilar to ‘Neoclassical Economics’

4 ► New Institutional Economics: Origins Core focus is to understand how transaction costs shape both institutional environment and institutional arrangements/contracts/governance structures. ► Finally, policy analysis should be guided by ‘comparative institutional analysis’ (Coase, 1964) The emphasis in the NIE on positive transaction costs derives from the work of Coase (1937; 1960) (Eggertsson, 1990). ► Contemplation of an optimal system may provide techniques of analysis that would otherwise have been missed and, in certain special cases, it may go far to providing a solution. But in general its influence has been pernicious. It has directed economists attention away from the main question, which is how alternative arrangements will actually work in practice. It has led economists to derive conclusions for economic policy from a study of an abstract of a market situation. (Coase, 1945, p. 195)

5 New Institutional Economics: An Overview

6 Transaction Cost Economics (TCE) ► Williamson’s (1975; 1985; 1991) TCE has been called the ‘make-or-buy’ or ‘outsource’ framework; it has been used to study vertical integration ► Two behavioral assumptions are important ► Transaction is the unit of analysis and has three attributes ► Asset specificity and the TCE approach defined ► Five types of asset specificity exist: site, physical, human, dedicated and temporal ► Empirical tests of the TCE hypothesis

7 NIE and Theories of the Firm Bounded rationality and opportunism Maladaptation due to shirking Transaction Ex post No Yes VI/Internal organization preferred when investments are relationship specific 1 Behavioral Assumptions Types of Costs Unit of Analysis Incentive Alignment Ownership and Control Separate? Vertical Boundary? Organization Hypothesis Empirical Rank TCEAgencyProperty RightsCoase (1937) Bounded rationality and opportunism Monitoring and shirking Contract Ex ante Yes No VI/Internal organization preferred as value of residual control increases 2 Bounded rationality and opportunism Bargaining over control of asset Transaction/asset Ex ante No Yes VI/Internal organization preferred as value of excludable rights over asset increases 2 Bounded rationality ? Search, bargaining, enforcement Transaction Ex ante, perhaps No Yes VI/Internal organization preferred for similar transactions -

8 NIE and Future Research: Some Examples in Rural Health ► A simple mathematical/empirical approach P i = αE i + β́X i + u i, - P i is the performance level of rural hospital i; - E i is a dummy variable indicating whether a rural hospital is “within” or “without” group; - α is an estimated coefficient measuring the effect of some treatment on performance of a rural hospital; - β is a vector of parameters; and - u i is an error term. Some possible organization ‘treatment effects’ for empirical research ► E i would be whether a rural hospital ‘outsources’ for physician services; and E i would be negative indicating outsourcing adversely affects performance TCE E i would be a board characteristic (e.g. length of term, board turnover, size of board); Agency Policy E i would be implementation of a health care regulation

9 NIE and Rural Development: Some Ideas for Extension Programs ► Board training for rural community organizations: “Healthy Boards” Training modules on board governance and management, ethics in business, strategic and performance management, and team building tools Rural hospitals; Agricultural cooperatives; Rural water districts; Community health centers; Livestock/fair boards; Economic development boards; and Public school boards National Association of Community Health Centers Oklahoma Primary Care Association Oklahoma Rural Health Association Oklahoma Rural Health Research and Policy Center Oklahoma Rural Water Association Oklahoma State School Board Association ► ► ► Network partnerships: Target audiences:

10 Concluding Remarks ► ► It is harvest time ► It is time to design extension programs using NIE principles of organization It is time for action; more agricultural economists are needed

11 Questions? James N. Barnes, Ph.D. Assistant Professor of Rural Development Department of Agricultural Economics Oklahoma State University