The Transaction Costs of Semi-Public Institutions: Railway History as a Challenge for Coase

377 Pages Posted: 2 Dec 2011

See all articles by Martin Holterman

Martin Holterman

European University Institute - Florence School of Regulation

Date Written: September 8, 2011

Abstract

In order to examine usefulness of the New Institutional Economics (NIE) for semi-public institutions such as public utilities and public transport, this thesis confronts the various “children of Coase” with a case study of the history of the railways in five European countries. Starting with a detailed examination of the various models, as well as their pedigree, I identify a number of key markers that would have to be present in the historical narrative for the various models to work. Some of these are common to all of the New Institutional Economics, like the presence of efficiency optimizing behaviour, while others are to some extent unique to the work a single author, such as Oliver Williamson’s asset specificity or the uncontractiblility of certain investments that is emphasized in the models of Incomplete Contract Theory.

Subsequently, I discuss the history of the railways from the point of view of the New Institutional Economics, dividing this 185 year period into four phases: Beginnings, Consolidation, Nationalisation, and Privatisation. In each of these periods, I compare five countries: Great-Britain, France, Prussia/Germany, Belgium and the Netherlands, before going over the markers identified in the theoretical chapter.

In order to allow for the descriptive power of NIE to be assessed more objectively, the last part of the thesis briefly examines two alternative approaches: public choice theory and path dependence. Each is briefly introduced, and then confronted with the historical narrative.

The result of all this confrontation is that the relative strengths and weaknesses of NIE become readily apparent. What it dearly needs, and what I have already endeavored to give it in the theoretical chapter, is a model of the forces that push the institutional outcomes towards the optimum identified by the model. These “alignment mechanisms”, as I have called them, answer the question why an institutional setup that is properly aligned with the characteristics of the transactions that it governs should be more likely than any other setup. While the examination of path dependence forces us to consider this problem, path dependence as such does not provide any easy answers, except when a great deal of politics is admitted.

Ancillary to this is the shortcoming highlighted by comparing NIE with Public Choice Theory. Individuals matter, even in the face of the vast forces of history. Since the paradigmatic situation for any Coasian model consists of two parties connected by a transaction, the tendency is very much to consider the government as one, unified party. Given that Public Choice Theory is proven to be most useful for the case study exactly when and where NIE is at its weakest, perhaps it is worth looking into the possibility of studying several transactions at once: the main transaction of interest, but also certain key transactions taking place within the firms that are the parties for the purposes of the main transaction.

Beyond this criticism are the remarks we could make about economics as a science. While there is no explicit comparison with other social sciences in this thesis, some shortcomings are readily apparent. Especially when it comes to the problem of timing – why an important reform took place when it did rather than a decade earlier or later – the historical narrative screams for a more political approach. This task, however, is not within the scope of the present thesis.

As for the railways themselves, I am generally hesitant to be too bold in my recommendations. Nevertheless, there is no way that I can see that an economist could condone the current practice of liberalization without privatization. More generally, I recommend that the decision makers should consider what exactly is the reasoning behind their choices. If we knew what kind of – for lack of a better word – theory was behind their decisions, it would be easier to analyze whether they were proved right.

Keywords: New Institutional Economics, Railways, Economic History, Privatisation, Nationalisation

JEL Classification: B25,D23, L33, N73, N74

Suggested Citation

Holterman, Martin, The Transaction Costs of Semi-Public Institutions: Railway History as a Challenge for Coase (September 8, 2011). Available at SSRN: https://ssrn.com/abstract=1967094 or http://dx.doi.org/10.2139/ssrn.1967094

Martin Holterman (Contact Author)

European University Institute - Florence School of Regulation ( email )

Florence
Italy

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