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How to Make Institutional Economics Policy-Relevant: Theoretical Considerations and an Application to Rural Credit Markets in Developing Countries

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  • Petrick, Martin

Abstract

Welfare economics as the traditional, prescriptive theory framework used in agricultural economics has been criticised by institutional economists as being largely irrelevant to real-world policy issues. We therefore ask how normative statements are possible within an economic theory framework that does recognise the importance of institutional arrangements. Instead of applying established outcome-oriented criteria of social welfare, we examine whether the rules of economic interaction allow the acquisition of gains from cooperation. We suggest to reconstruct any interaction as an existing or repealed social dilemma. This approach helps to identify common rule interests which create room for improvement of all parties involved, and to suggest desirable institutional reforms. An application to credit markets in developing countries demonstrates the insufficiency of welfare economic arguments and the potential insights generated by a social dilemma heuristic. The latter sheds new light on the role of various forms of collateral and informal arrangements to overcome credit rationing.

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Bibliographic Info

Paper provided by International Association of Agricultural Economists in its series 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia with number 25702.

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Date of creation: 2006
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Handle: RePEc:ags:iaae06:25702

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Related research

Keywords: Agricultural Finance; Institutional and Behavioral Economics; D02; D63; D74; Q14;

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  1. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  3. Buchanan, James M, 1975. "A Contractarian Paradigm for Applying Economic Theory," American Economic Review, American Economic Association, vol. 65(2), pages 225-30, May.
  4. Bell, Clive, 1988. "Credit markets and interlinked transactions," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 16, pages 763-830 Elsevier.
  5. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
  6. Brennan,Geoffrey & Buchanan,James M., 2008. "The Reason of Rules," Cambridge Books, Cambridge University Press, number 9780521070904, October.
  7. Coco, Giuseppe, 2000. " On the Use of Collateral," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 191-214, April.
  8. Demsetz, Harold, 1969. "Information and Efficiency: Another Viewpoint," Journal of Law and Economics, University of Chicago Press, vol. 12(1), pages 1-22, April.
  9. Eggertsson, Thrainn, 1998. " Limits to Institutional Reforms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 335-57, March.
  10. Gardner, Bruce L. & Gale Johnson, D., 2002. "Policy-related developments in agricultural economics: Synthesis of handbook volume 2," Handbook of Agricultural Economics, in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 2, chapter 42, pages 2215-2249 Elsevier.
  11. Petrick, Martin, 2004. "Credit rationing of Polish farm households: a theoretical and empirical analysis," Studies on the Agricultural and Food Sector in Central and Eastern Europe, LeibĀ­niz Institute of Agricultural Development in Central and Eastern Europe (IAMO), volume 26, number 93022.
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