Understanding Economic Behavior and Institutional Frameworks


1. New Cognitive Perspectives

(A) Arruñada, Human Nature and Institutional Analysis

This section explores the consequences of our cognitive specialization, highlighting how the human brain evolved through a competitive process of genetic natural selection. It delves into the concepts of rationality, risk aversion, weakness of will, and the role of institutions in shaping human behavior.

  • Rationality: Our minds are economical and ecological, but maladaptation can lead to risk aversion and weakness of will.
  • Cooperation: Farsighted contracting, detection, and reciprocity play crucial roles in fostering cooperation.
  • The Role of Institutions: First-party (self-enforcement), second-party (reciprocity), and third-party enforcement mechanisms support cooperation.

Conclusion: Nature and nurture are intertwined in shaping human behavior.

(B) Nicholson, How Hardwired is Human Behavior?

This section examines the influence of cognitive biases on behavior, such as classification before calculus (stereotyping) and correspondence bias. It also explores the role of contest and display in shaping gender roles and hierarchies.

2. Incentive Management

(A) Fehr & Falk, Psychological Foundations of Incentives

This section analyzes the impact of reciprocity, social approval, and intrinsic motivation on individual behavior in economic contexts. It highlights how economic incentives can sometimes undermine social incentives and intrinsic motivation.

  • Reciprocity: Individuals tend to cooperate when treated fairly, leading to phenomena like downward wage rigidity.
  • Social Approval: The desire for social approval can motivate individuals to contribute to public goods.
  • Intrinsic Motivation: Strong intrinsic motivation can be replaced by weaker extrinsic incentives.

(B) Cowen, Discover Your Inner Economist

This section provides four rules for effectively using monetary incentives:

  1. Offer rewards for high-effort tasks.
  2. Offer rewards when intrinsic motivation is weak (avoiding the crowding-out effect).
  3. Offer rewards when receiving money generates social approval.
  4. Avoid excessive rewards that can lead to choking under pressure.

Additionally, the concept of herding behavior is explored, where stressed individuals tend to follow the crowd.


1. Markets and Organizations: Divisionalization

(A) Jensen & Meckling, Specific Knowledge and Divisional Performance Measurement

This section discusses the challenges of transferring specific knowledge within organizations and the potential for conflicts of interest between agents and principals. It introduces the concept of expense centers as divisions that provide services to the rest of the organization.

(B) Arruñada; Markets for Public Services

This section emphasizes the importance of linking remuneration to performance indicators, granting freedom of choice, and establishing mechanisms for evaluation and compensation.

2. Markets versus Politics

(C) Hayek, The Use of Knowledge in Society

This section compares the efficiency of centralized and decentralized economic planning, highlighting the challenges of dispersed knowledge. It argues that the price system effectively addresses these challenges.

(D) Frank, Externalities (Microeconomics & Behavior)

This section explores the reciprocal nature of externalities and introduces Coase’s Theorem, which states that efficient outcomes can be achieved through costless negotiation, regardless of initial liability assignments.

(F) Coase, The Problem of Social Cost (1960)

This section delves deeper into the problem of externalities, contrasting Pigou’s approach of using taxes or fees to correct negative externalities with Coase’s emphasis on bargaining, property rights, and transaction costs.


1. Institutional Support of Private Contracting

(A) Arruñada, The Role of Institutions in the Contractual Process

This section examines the role of institutions in facilitating and enforcing contracts, addressing challenges such as lack of information. It explores the use of facilitating rules, mandatory rules, ex-ante legal completion through standard contracts, and ex-post completion through third-party enforcement mechanisms.

2. Topics in the Economics of Contract Law

(A) Cooter & Ulen

This section discusses contracts of adhesion, which are standardized contracts presented on a take-it-or-leave-it basis, often to weaker parties with limited bargaining power.

3. Role of Business Firms in Society

(A) Friedman, The Social Responsibility of Business is to Increase its Profits

This section presents the view that the primary responsibility of businesses is to maximize profits for their shareholders.

(B) Arrow, Social Responsibility and Economics Efficiency

This section acknowledges that competition can prevent firms from accumulating excessive power but also highlights the potential for unequal wealth distribution and the role of externalities and information asymmetries.

(C) Franklin, Just Good Business

This section emphasizes the importance of ethical codes in guiding business behavior and promoting responsible practices.