CEU, Economics Department, Winter 2006

Instructor: Prof. Peter Grajzl

Office: Okt. 6th St. #810
Office Hours: By appointment

Course: 2 credits

"Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape
human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic."
(North 1990, p. 3)

This course (as well as Comparative Institutional Economics 2 taught in the Spring 2006 semester) studies the nature of
different institutional arrangements and associated organizational forms, and their impact on economic performance.
Employing a comparative perspective and discussing both theoretical and empirical contributions, the course draws on
examples from existing capitalist economies, transition experience, evolving European Union, as well as more distant history.

The course is open to PhD and advanced MA students. Prerequisites include graduate level microeconomic theory and

Class Times

Class time will be divided into ten 120-minute lectures.

Course Requirements

Grading will be based on a final exam (50%) and a short paper (50%).

The final exam will be of a take-home, open-book format. I will be more specific about the exam as the exam date
(Wednesday, April 12) approaches.

The aim of the short paper (due date to be specified) is to generate research ideas that could culminate in a research
project. You may choose any topic of pertinence to economics of institutions. Feel welcome to talk to me about your
research ideas. Your paper should (i) motivate the precise question to be addressed, (ii) place the question within the
pertinent existing literature, and (iii) propose an analytical framework (theoretical or/and empirical) you plan to adopt to
answer the question. You are not expected to have a particular model or estimation strategy already worked out. You are,
however, expected to convince the reader that your research question is interesting, thought through and realizable. The
paper should not exceed five double-spaced pages in length.

Reading list

The following reading list has considerably more entries than will be covered in the course and thus serves as a guideline
to the literature on particular topics. Additional readings may be added as we go along. Which readings are most pertinent
will be indicated in class. Readings not available on the internet or in the library will be provided.

0. Introduction and Overview

North, Douglass C. 1991. "Institutions." Journal of Economic Perspectives, 5:2, 97-112. [JSTOR]

Williamson, Oliver E. 2000. "The New Institutional Economics: Taking Stock, Looking Ahead." Journal of
Economic Literature, 38:3, 595-613.

Greif, Avner. 2006. Institutions and the Path to the Modern Economy: Lessons from Medieval Trade. Chapter 2:
Institutions and Transactions.

Djankov, S., E. Glaeser, R. La Porta, F. Lopez-de-Silanes, and A. Shleifer. 2003. "The New Comparative Economics."
Journal of Comparative Economics, 31:4, 595-619.

Dixit, Avinash K. 2005. "Economic Governance." Draft, do not cite. To appear in The New Palgrave Dictionary of
Economics, 2nd Edition.

Murrell, Peter. 2005. "Institutions and Transition." To appear in The New Palgrave Dictionary of Economics, 2nd Edition.

Roland, Gerard. 2004. "Understanding Institutional Change: Fast-Moving and Slow-Moving Institutions." Studies in
Comparative International Development.

1. Property Rights and Ownership

Shavell, Steven. Foundations of Economic Analysis of Law. Part I: Property Law. Harvard Univ. Press, 2004.

Grossman, Sanford J. and Oliver Hart. 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and
Lateral Integration." Journal of Political Economy, 94:4, 691-719.

Shleifer, Andrei and Robert W. Vishny. 1994. "Politicians and Firms." Quarterly Journal of Economics, 109:4, 995-1025.

Hart, Oliver, Andrei Shleifer and Robert W. Vishny. 1997. "The Proper Scope of Government: Theory and Application
to Prisons." Quarterly Journal of Economics, 112:4, 1127-1161.

Li, David D. 1996. "A Theory of Ambiguous Property Rights in Transition Economies." Journal of Comparative
Economics, 23, 1-19.

Che, Jiahua and Yingyi Qian. 1998. "Insecure Property Rights and Government Ownership of Firms." Quarterly Journal
of Economics, 113:2, 467-496.

Djankov, S., C. McLiesh, T. Nenova, and A. Shleifer. 2003. "Who Owns the Media?" Journal of Law and Economics,
46:2, 341-382.

Buchanan, James M. and Yong J. Yoon. 2000. "Symmetric Tragedies: Commons and Anticommons." Journal of Law
and Economics, 43:1, 1-14.

2. Decentralization and Federalism

Bardhan, Pranab. 2002. "Decentralization of Governance and Development." Journal of Economic Perspectives,
16:4, 185-204.

Dewatripont, Mathias and Eric Maskin. 1995. "Credit and Efficiency in Centralized and Decentralized Economies."
Review of Economic Studies, 62:4, 541-555.

Weingast, Barry. 1995. "The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Growth."
Journal of Law, Economics and Organization, 11:1-31.

Roland, Gerard. Transition and Economics. Politics, Markets, and Firms. Chapter 11, Incentives within Government
Bureaucracy. MIT Press, 2000.

Qian, Yingyi and Barry Weingast. 1997. "Federalism as a Commitment to Preserving Market Incentives." Journal of
Economic Perspectives, 11:4, 83-92.

Blanchard, Olivier and Andrei Shleifer. 2001. "Federalism With and Without Political Centralization: China versus
Russia." IMF Staff Papers.

Cai, Hongbin and Daniel Treisman. 2004. "State Corroding Federalism." Journal of Public Economics, 88:3-4,

Alesina, Alberto and Roberto Perotti. 2004. "European Union: A Politically Incorrect View." Journal of Economic
Perspectives, 18:4, 27-48.

Alesina, A., I. Angeloni, and F. Etro. 2005. "International Unions." American Economic Review. 95: 602-15.

3. Rule of Law

Hayek, Freidrich A. The Constitution of Liberty. Part II, Freedom and the Law. Univ. of Chicago Press, 1978.

Cass, Ronald A. 2003. "Property Rights Systems and the Rule of Law." Boston University School of Law Working
paper 03-06.

North, Douglass and Barry Weingast. 1989. "Constitutions and Commitment: The Evolution of Institutions Governing
Public Choice in Seventeenth-Century England." Journal of Economic History.

Weingast, Barry. 1997. "Political Foundations of Democracy and the Rule of Law." American Political Science
Review, 91, 245-263.

Hoff, Karla and Joseph E. Stiglitz. 2004. "After Big Bang? Obstacles to the Emergence of the Rule of Law in
Post-Communist Societies." American EconomicReview. 94:3, 753-63.

Frye, Timothy. 2004. "Credible Commitment and Property Rights: Evidence from Russia." American Political
Science Review, 98:3, 453-466.

4. Corruption

Bardhan, Pranab. 1997. "Corruption and Development: A Review of Issues." Journal of Economic Literature,
35, 1320-46.

Wallis, John J. 2005. "The Concept of Systematic Corruption in American Political and Economic History." In E.
Glaeser and C. Goldin (eds.), Corruption and Reform: Lessons from America's Economic History, Univ. of Chicago
Press, forthcoming.

Shleifer, Andrei and Robert W. Vishny. 1993. "Corruption." Quarterly Journal of Economics, 108:3, 599-617.

Acemoglu, Daron and Thierry Verdier. 2000. "The Choice Between Market Failures and Corruption." American
Economic Review, 90:1, 194-211.

Waller, C.J., T. Verdier, and R. Gardner. 2002. "Corruption: Top-Down or Bottom-Up?" Economic Inquiry, 40:4, 688-703.

Choi, Jay Pil and Marcel Thum. 2005. "Corruption and the Shadow Economy." International Economic Review,
46:3, 817-836.

Mauro, Paulo. 1995. "Corruption and Growth." Quarterly Journal of Economics, 110:3, 681-712.

Treisman, Daniel. 2001. "The Causes of Corruption: A Cross-National Study." Journal of Public Economics, 76:3, 399-457.

Fisman, Raymond. 2001. "Estimating the Value of Political Connections." American Economic Review, 91:4, 1095-1102.

5. Transactions and Contracts

Greif, Avner. 2000. "The Fundamental Problem of Exchange: A Research Agenda in Historical Institutional Analysis."
European Review of Economic History, 4:3, 251-284.

Dixit, Avinash. 2003. "Trade Expansion and Contract Enforcement." Journal of Political Economy, 111:6, 1293-1317.

Boerner, Christopher S. and Jeffrey T. Macher. 2005. "Transaction Cost Economics: An Assessment
of Empirical Research in the Social Sciences." Working paper.

Johnson, Simon, John McMillan and Christopher Woodruff. 2002. "Courts and Relational Contracts." Journal of Law,
Economics and Organization, 18:1, 221-277.

Gibbons, Robert. 2005. "Four Formal(izable) Theories of the Firm?" Journal of Economic Behavior and Organization,
58, 200-245.

Shavell, Steven. Foundations of Economic Analysis of Law. Part III, Contract Law. Harvard Univ. Press, 2004.

Posner, Richard A. 2004. "The Law and Economics of Contract Interpretation." John M. Olin Law and Economics
Working Paper.

Gennaioli, Nicola. 2006. "Contracting in the Shadow of the Law." Working paper.