Costly Institutions as Substitutes: Novelty and Limits of the Coasian Approach

Journal of Institutional Economics, vol. 11, issue 2, 2015, pp. 265-281 (Ronald H. Coase memorial issue)

13 Pages Posted: 20 May 2015

See all articles by Ugo Pagano

Ugo Pagano

University of Siena - Department of Economics

Massimiliano Vatiero

University of Trento - Department of Economics and Management; Università della Svizzera italiana

Date Written: April 15, 2014

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.

Keywords: Ronald Coase, transaction costs, institutions, institutional complementarities.

JEL Classification: B25, D23, D62, K00

Suggested Citation

Pagano, Ugo and Vatiero, Massimiliano, Costly Institutions as Substitutes: Novelty and Limits of the Coasian Approach (April 15, 2014). Journal of Institutional Economics, vol. 11, issue 2, 2015, pp. 265-281 (Ronald H. Coase memorial issue) . Available at SSRN: https://ssrn.com/abstract=2607566

Ugo Pagano

University of Siena - Department of Economics ( email )

Piazza S. Francesco, 7
I-53100 Siena
Italy
+39 057 7232614 (Phone)
+39 057 7232661 (Fax)

Massimiliano Vatiero (Contact Author)

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

Università della Svizzera italiana ( email )

Via Giuseppe Buffi 13
Lugano, Ticino 6900
Switzerland

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