Costly institutions as substitutes: novelty and limits of the Coasian approach

Abstract

One of the main contributions of Ronald H. Coase was to demonstrate how mainstream economics was based on a contradictory amalgam of costly physical inputs and free institutional resources, and to gave origin the economics of institutions: each institution is a mode of allocation and organization of economic resources that is to be investigated. In particular, none of the institutions (including the market) is a free lunch. The Coasian approach regards institutions as costly substitutes and provides a fundamental starting point for comparative institutional analysis. However, Coase neglected two issues deriving from the observation that institutions are not cost-free. First, when institutions are costly, one should not only consider their possible substitutes but also how complementary institutions affect their costs, as well as the costs of the possible institutional substitutes. Secondly, the economic analysis should also take into account that the transition from one institutional setup to another cannot occur in costless meta-institutions. The initial conditions may substantially affect the final institutional arrangements. Both the novelty of Coase's approach and its limits were grossly undervalued. The costly institutions assumption requires a view of economics as a historical discipline.

On the (Political) Origin of ‘Corporate Governance’ Species

“…Two institutions are complementary when the 'performance' of one institution benefits from the presence of another institution and vice versa (cf. also Pagano and Vatiero, 2015). 13.…”

Learning from the Swiss Corporate Governance Exception

“…The main lesson to be learned from the Swiss case is that politics matters in the evolution of corporate governance and that institutional complementarities may constitute a hereditary mechanism that explains institutional diversities (cf. Aoki, ; Pagano and Vatiero, ; Vatiero, ). Institutional complementary theory suggests that various elements can consistently complement each other to form path‐dependent economic outcomes within broader institutional contexts (see also Pagano and Vatiero, ).…”

“…Aoki, ; Pagano and Vatiero, ; Vatiero, ). Institutional complementary theory suggests that various elements can consistently complement each other to form path‐dependent economic outcomes within broader institutional contexts (see also Pagano and Vatiero, ). In this paper, I emphasize that politics has a pivotal role in this path‐dependence.…”

“…On the other hand, changes may put in action a circular and cumulative causation leading to large variation of institutions and economic equilibria (cf. Pagano and Vatiero, 2015). For instance, because of the complementarities between innovation and corporate governance, as will be introduced in Section 4, the rise of radical innovative sectors (such as information technology and biotechnologies) around the world in the last decades should push countries towards a corresponding corporate equilibrium characterized by flexibility of assets.…”

Introduction to the Ronald H. Coase memorial issue

“…Addressing Coase's enduring contribution to our understanding of the firm, Loasby (2014) gives a fresh interpretation, underling the role of knowledge and the nature of institutions, which offers challenging insights concerning the scope of economics. Likewise probing Coase's analysis of institutions, Pagano et al (2014) argue that while Coase rightly saw the creation of institutions as costly, he downplayed the possibility of complementarities and overlooked the meta-institutions concomitant with institutional change. Miceli (2014) also addresses the problem of institutional (or organizational) choice.…”