Institutions and the East Asian miracle : asymmetric information, rent - seeking, and the deliberation council

North (1984) argues that it is not the cost of transport but the cost of transactions that prevents economies from realizing well-being - and that institutions matter because they affect the costs of transactions. The authors analyze the role of the deliberation council - an institution common to most of the high performing Asian economies - in reducing the crippling effect of rent-seeking. A deliberation council is a consultative committee whose members include high-ranking government officials and representatives from the private sector - usually from industry (especially high business) and academia, sometimes from consumer groups and labor. Councils can be organized by industry or sector (as with the Industrial Structure Council of Japan) or by theme or function (as with Thailand's Joint Public Sector-Private Sector Consultative Committee). Generally, the deliberation council has a quasi-legislative authority, and policies cannot be introduced or changed without its recommendation and approval. Unlike a legislative committee, its private sector reprensentatives are not elected but are chosen (by industry or labor, for example, and not necessarily through voting) and its government officials generally become representatives by virtue of appointment to their present position. The authors construct a two-stage incomplete information game model with two identical firms and various links to real-world processes. It is a highly simplified model that focuses on the awarding of government contracts. They use the model to gain insight into the problem of rent-seeking in developing countries and to test their hypothesis. Rent-seeking occurs partly because people are uncertain about the intentions and plans of potential competitors - they engage in rent-seeking for fear that not doing so might give their competitors a huge advantage. To the extent that the council generates an exchange of information, this uncertainty is reduced, so one would expect less rent-seeking. Such exchanges reduce information (transaction) costs and thus improve efficiency. The model confirms that firms are better off it they can communicate their true valuations to competitors than when they cannot. The deliberation council induces participation to reveal true information, and the model shows that the payoffs are better with communication than without.