Economic Development Final Institutions

Front 1

Institution

Back 1

The constraints placed by law and social norms on human behavior

Front 2

Transaction Costs

Back 2

The costs associated to simple transactions such as buying or selling merchandise, borrowing money, or investing in a business

Front 3

Formal Institutions

Back 3

Institutions that are codified rules (in writing)

Front 4

Political Institutions

Back 4

The set of rules that define the powers of the major political bodies and players, and how they are selected (define democracy or dictatorship)

Front 5

Legal Institutions

Back 5

Non-political codified laws

Front 6

Common-law System

Back 6

Law system based on legal precedents

Front 7

Civil-law systems

Back 7

Law systems that rely mostly on recorded legal statutes

Front 8

Informal Institutions

Back 8

Institutions that are not legally codified

Front 9

What are the 5 institutional problems?

Back 9

Informational Problem, Hold-Up Problem, Commitment Problem, Cooperation Problem, and Coordination Problem

Front 10

Asymmetrical information (Informational Problem)

Back 10

When one party has more information about the product/service/land than the other party

Front 11

Adverse Selection (Informational Problem)

Back 11

A situation caused by informational asymmetries in which reputable lenders and sellers leave the market to disreputable players, resulting in a possible market collapse

Front 12

Moral Hazard

Back 12

The possibility of unobservable actions one of the contracting parties can take that will hurt the interest of the other contracting party

Front 13

What are some formal institutional solutions to informational problems?

Back 13

Disclosure rules, regulation of access or entry into a profession, warranty, return policies, and signaling, informational intermediaries, and rating agencies

Front 14

What are two informal institutional solutions to informational problems?

Back 14

Relational contracting and reputation

Front 15

Hold-Up Problem

Back 15

A situation in which a business partnership requires an investment from one of the parties that is specific to the transaction in question and, once the investment has been made, the other partner "holds up" the party that made the investment in order to renegotiate the deal

Front 16

What is the formal institutional solution and the informal institutional solution to the hold-up problem?

Back 16

Binding and legally enforceable contracts, vertical integration

Front 17

Commitment Problem

Back 17

A situation where one party reneges on prior commitments made to another party in the course of joint transactions, specifically during sequential transactions

Front 18

What is the formal institutional solution and the two informal institutional solutions to the commitment problem?

Back 18

Contract enforcement, credibility and witnesses to the contract/agreement

Front 19

Cooperation Problem

Back 19

A situation where individuals follow their self-interest in making their choices and where the outcomes of these choices are less than optimal for all parties

Front 20

Nash Equilibrium

Back 20

A situation in which each agent has chosen an action that is optimal given the action of the other

Front 21

Dominant Strategy

Back 21

A situation in which the same action is optimal and independent of what the other player chooses

Front 22

What is a some solutions to the cooperation problem?

Back 22

Institutions such as: labor unions, professional organizations, political parties, and international institutions - DEMOCRACY!!! (to help build these associations)

Front 23

Collective-action Problem

Back 23

When people fail to undertake collective action even though it is in their joint interest to do so

Front 24

Coordination Problem

Back 24

A situation in which agents can all coordinate on a specific action and the action an individual chooses depends on what others do (multiple equilibria)

Front 25

Why is it important to understand coordination problems?

Back 25

Because countries coordinate on suboptimal equilibrium - i.e. corruption or low level of law abidance becomes optimal for agents because that is what others are doing

Front 26

What are 2 solutions to coordination problems?

Back 26

Formal laws and regulations, social conventions, focal point, and the big push idea: the government or groups of people use a "big push" to get the society to move to the optimal equilibrium

Front 27

Focal Point

Back 27

A solution to a coordination problem that most people will find without having to communicate

Front 28

Functionalist Fallacy

Back 28

When an object's function is confused with the cause of its existence

Front 29

What are the three types of transactional costs?

Back 29

Search and information costs, bargaining costs, and policing and enforcement costs

Front 30

Market-Creating Institutions

Back 30

Institutions that protect property rights, ensure that contracts are enforced, minimizing corruption - creates an environment for business; police and enforceable contracts

Front 31

Market-Regulating Institutions

Back 31

Institutions that limit monopolies, manage public goods, deal with market failures - regulatory agencies

Front 32

Market-Stabilizing Institutions

Back 32

Institutions that ensure low inflation, low macroeconomic volatility - that stabilize economy with policies; independent central banks

Front 33

Market-Legitimizing Institutions

Back 33

Institutions that provide social protection and insurance, redistribute, and manage conflict - legitimize marginalized persons; pension systems, unemployment benefits