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   Course Title    Institutional Economics
Lecturer    Kaire Põder
Institution    Estonian Business School
Country    Estonia

I. Introduction:

"Institutional Economics" is a course in new political economy. Course is interdisciplinary and investigates relations between microeconomics, political theory, legal studies, gender studies and public choice theory. Today economics is investigating constraints and other characteristics of human behavior do determine sources of economic growth. In addition to economic factors a lot of historical, religious, etc factors influence our choices and behavior. In economics we call all such factors institutional. During the course we study formal and informal institutions, causes and possibilities of institutional change and institutional effects to economic growth.

This course is elective offered to the BBA, BPA and Executive MBA programs. Course will consist of lectures and seminars.

To cover interdisciplinary areas of the course the coordinator will organize guest lectures from other academic institutions, ministries and private firms.

II. Aims and objectives:

The course has three basic aims:

    • To familiarize students with basic instruments of microeconomic choice theory;
    • To widen students mind about possible formal and informal constraints that determine our behavior;
    • To explain relationship between institutional characteristics and economic growth.

The objectives of the course are to promote a critical and informed understanding of modern microeconomic theory especially about new political economy and public choice theory and to enable students to articulate their understanding of the subject clearly and concisely in seminar discussion and in written essays.

III. Teaching method:

There will be 3 seminars and 12 lectures, with each having duration of 1 hour. At least half of the lectures are held by visiting lecturers. Each student has the opportunity to prepare papers for seminars. Each paper is graded, but only one is compulsory. Paper gives 20% of the overall grade. Specific area of study presented in the paper is chosen by students and consulted by lecturer. The length of the paper is maximum 4000 worlds. Final exam will be a written essay.

Course assessment:

  • Paper (essay) 40% (due on the …..of …)
  • Final exam 60%


A+ 100-97 %

A    96-93 %

A-   92-89 %

B+  88-85 %

B    84-81 %

B-   80-77 %

C+ 76-73 %

C   72-69 %

C-   68-65 %

D+  64-61 %

D    60-57 %

D-   56-53 %

    F     52-…. %

    Special conditions and penalties:

    • Participation in seminars is compulsory. Non-attending will decrease overall result by 5%.

    • The essays must be turned in by dates indicated above. Failure to turn in the essay on the right time will cost student one point (of 20 possible points) for each day the essay is late.

    Assessment criteria for exam and essay:

    Assessment involves evaluating three categories: presentation, content and critical judgement.

    The more successful a piece is in each of these categories, the higher score will be received. However, the assessment of written work is an art, not an exact science.


    • Clarity of expression
    • Consistency of purpose
    • Explicit structure
    • Clear conclusion


    • Relevance to topic
    • Development of argument
    • Demonstration of required reading

    Critical judgement

    • Thoroughness of analysis
    • Independence of judgement
    • Critical appraisal

    IV.  Reading list

    Core Texts:

    Krugman, Paul (1998), Pop Internationalism, MIT Press.

    North, Douglass (1990), Institutions, Institutional Change and Economic Perfomance, Cambridge University Press;

    Olson, Mancur (1982), The Rise and Decline of Nations, Yale University Press;

    Alston, Eggertsson, North (1998), Empirical Studies in Institutional Change, Cambridge University Press;

    Coase, R., "The Firm, the Market and the Law"(1988) University Chicago Press

    Buchanan, J., Tolloson, R., Tullock, G. "Toward a Theory of the Rent-Seeking Society" (1980), Texas A&M University Press;

    Stigler, George (1997), Chicago Studies in Political Economy, The University of Chicago Press.

    Other Materials:

    Handouts will be prepared for all lectures and seminars, and relevant articles from academic journals by theorists covered by the course will be distributed; policy-orientated op-eds from leading newspapers will also be handed out at lectures.

    V. Course outline:







    Introduction to institutional economics

    Kaire Põder



    Formal Institutions 1

    Kaire Põder



    Formal Institutions 2

    Visiting lecturer



    Informal Institutions 1

    Visiting lecturer



    Seminar 1

    Kaire Põder



    Informal institutions 2

    Visiting lecturer



    Informal institutions 3

    Visiting lecturer



    International institutions 1

    Visiting lecturer



    Institutional Change

    Visiting lecturer



    Seminar 2

    Kaire Põder



    Rent seeking and rent avoidance

    Kaire Põder



    Pigou vesus Coase

    Kaire Põder



    New political economy

    Visiting lecturer



    Institutions and economic growth

    Kaire Põder



    Seminar 3

    Kaire Põder



    Exam (written)


    VI. Description of lecture topics:

    1. Introduction to institutional economics.
    2. Introductory lecture gives a historical overview of the old (Galbraight, Veblen) and new institutionalists (Buchanan, Tullock, North, Coase). Main emphases are given to the technical introduction of the theory of rational choice and transaction costs.


      D.North "Institutions, Institutional change and Economic Performance", Part I, Ch 1, Ch 2, Ch 3, Ch 4.

    3. Formal Institutions 1.
    4. Second lecture introduces institutional constraints in the economy. We deal with legal system as an institution. Enforcement of the contracts and laws is also under surveillance. We discover different Impact of common and civil law to the behavior of markets and economic development.


      D.North "Institutions, Institutional change and Economic Performance", Part I, Ch 5, Ch 6, Ch 7, Ch 8.

      L. Alston, T.Eggertsson, D. North "Empirical Studies in Institutional Change", Part I Toward an understanding of property rights.

    5. Formal Institutions 2.
    6. Third lecture introduces political regulation and other forms of market intervention through the institutional theory. The key words of this lecture are regulation, control and politics. We also introduce Central Bank and Fiscal authorities and their impact to economic growth.


      L. Alston, T.Eggertsson, D. North "Empirical Studies in Institutional Change", Part 5 Regulation is a dynamic setting.

      G.Stiegler "Chicago Studies of Political Economy", Part 2 The Theory of Economic Regulation.

    7. Informal Institutions 1.
    8. Introduction to religion and historical overview of religious development. Religion as an informal constraint. We are also introducing Max Weber idea of protestant ethics as a source and basis of today's western world order.


      Handout of Weber's Protestant Ethic "Origins, Evidence, Context" Part I Background and Context (1993).

    9. Informal Institutions 2.
    10. Introduction of issues related to inequality: social classes and their impact to economic growth, discrimination and the economic consequences. Also we learn about the idea of welfare state and issues related to gender and gender segregation.


      M. Olson "The Rise and Decline of Nations", Part 6 Inequality, Discrimination, and Developmen.t

    11. Informal institutions 3
    12. This lecture introduces the nationalism. We cover historical roots of nation states and want to give hints about the future of nation states at the light of globalization. Also we want to answer the question — do nationalism leads states to more rapid growth or vice versa.


      M. Olson "The Rise and Decline of Nations", Part 4 The Developed Democracies Since World War II.

    13. International institutions:
    14. How international institutions like EU or EMU and WTO and NATO will affect the institutional framework of nation states. What are the economic consequences of membership and non-membership?


      P. Krugman "Pop Internationalism", Ch 1 and Ch 10.

      M. Olson "The Rise and Decline of Nations", Part 5 Jurisdictional Integration and Foreign Trade.

    15. Institutional change
    16. We learn that the development of informal institutions and their change is path dependent and incremental. But what about the change of formal institutions? Who are interested bodies of changing formal institutions? Of course we have "good" examples of revolutions, reforms, wars and transformation, but how they influence the development path of institutions?


      D. North "Institutions, Institutional Change and Economic Performance", Part II.

      L. Alston, T.Eggertsson, D. North "Empirical Studies in Institutional Change", Epilogue.

    17. Rent seeking and rent avoidance.
    18. Who changes formal institutions? Under democratic system the interest of majority does? Is this really so and how pressure groups emerge? What is the difference of rent seeking and profit seeking? What is the Social Cost of Rent seeking?


      J.Buchanan, R.Tolloson, G.Tullock "Toward a Theory of Rent-Seeking Society", Ch 1 Rent Seeking and Profit Seeking, Ch 2 Rent Seeking as a Negative Sum Game.

    19. Coase versus Pigou
    20. What to do in the cases or market failures? Is "the traditional" state intervention through Pigouvian taxes and subsidies optimal choice for markets? We are introducing Coase criticism of Pigouvian assumptions and Coase theorem.


      R. Coase "The Firm, the Market and the Law", Part 3 The Social Cost of Regulation.

    21. New political economy
    22. We go further from Coase criticism to Pigou and develop critical view over welfare economics. Introducing also rational politicians and the public sector failure, theories provided by Niskanen, Tullock and Buchanan.


      G. Stiegler "Chicago Studies of Political Economy", Part 2, R.Posner The Social Cost of Monopoly and Regulation and H. Demsetz Why Regulate Utilities?

    23. Institutions and economic growth

    This lecture is an overview of previous subjects covered. We draw conclusions relating institutions and economic growth, also trying to rising testable hypothesis about Estonian economic success (or unsuccess) as a function of institutional development


    D.North "Institutions, Institutional Change and Economic Performance" III Part.

    VII. Seminar questions:

    1. Seminar 1.

      1. Why and how institutionalist starting from Veblen (or even starting from Marx) have criticized current "world order"?
      2. What are transaction costs? What is transaction cost economics?
      3. Formal institutions (name them and d0escribe them).
      4. What are public goods? How are the providers of public goods?
      5. Why cooperation in the case of public goods is complicated?

    2. Seminar 2.

      1. Introduce informal institutions in Estonia.
      2. Introduce nonprofit organizations in Estonia
      3. Introduce court system in Estonia and enforcement of rights (property) in Estonia
      4. What are the economic costs of regulation?

    3. Seminar 3

      1. Political rent-seeking in Estonia
      2. Thief and corruption in Estonia
      3. EU and EMU enlargement and change of formal institutions
      4. WTO and NATO and their impact to Estonia
      5. Is the public sector in Estonia too large, why?

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