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Law and the New Institutional Economics: Linking Insights and Research. Gary D. Libecap University of California, Santa Barbara National Bureau of Economic Research Hoover Institution, Stanford Mapping the Frontiers of New Institutional Economics

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law and the new institutional economics linking insights and research

Law and the New Institutional Economics: Linking Insights and Research

Gary D. Libecap

University of California, Santa Barbara

National Bureau of Economic Research

Hoover Institution, Stanford

Mapping the Frontiers of New Institutional Economics

June 11, 2008, University of Colorado School of Law

the new institutional economics
The New Institutional Economics
  • Focuses on the interaction between formal and informal institutions, including the law, and economic behavior.
  • Institutions to reduce uncertainty, sources of information, reduce the transaction costs of exchange. Coordinate collective action.
  • Promote trade, production, investment.
  • Used for redistribution.
  • Efforts to mold institutions.
the challenge operationalizing the nie
The Challenge: Operationalizing the NIE
  • Institutions are inherently difficult to measure.
  • Clarity in definitions and measurement.
  • Clear methodology and hypotheses.
  • Data (quantitative and qualitative) for testing.
  • Generalizations from the specific to the general.
water law transaction costs and water markets
Water Law, Transaction Costs, and Water Markets
  • California case study. Interaction between water law and observed water exchanges, 1987-2005.
  • Problem: Need to re-allocate water from historical uses in agriculture to urban and environmental uses. Large differences in relative values.
  • Water is not land. Interdependencies, bounding, and measurement issues. Regulatory role. Resistance to markets.
  • Precision in which water rights are defined and the nature of the regulatory review process may affect water exchanges.
water institutions and markets
Water Institutions and Markets
  • Courts, legislation, administrative rulings (State Water Resources Control Board): water rights and transfers.
    • Beneficial use, conservation, fallowing
    • Standing in regulation
    • Parties involved—rights owners, irrigation districts, Bureau of Reclamation, Department of Water Resources, Federal Central Valley Project
    • Endangered species, other third parties.
    • “No injury” rule.
water rights and markets
Water Rights and Markets
  • The Data
  • Patterns of transactions
  • Types of contracts used
nie analysis
NIE Analysis
  • Measurement
  • Approach
  • Conclusions
nie analysis data on legal change in california2
NIE Analysis: Data on Legal Change in California
  • Analysis of each statute, court ruling, and agency opinion in California 1980-2005
    • Subjective opinion of law students if there was a “significant” change in the law.
    • “1” coded and then remained, reflecting a permanent change in the institutional environment.
    • “1” coded if any category had another significant change.
nie statistical analysis
NIE Statistical Analysis
  • Number and Quantity of Transactions = f(Year Variables, Controls: precipitation, population, canals, state GDP, ag share, other ag data-land in farms, harvested, etc- per capita income)
nie statistical analysis1
NIE Statistical Analysis

Determinants of the Number of Water Transfers

nie statistical analysis2
NIE Statistical Analysis

Determinants of the Volume of Water Transferred

nie and legal analysis
NIE and Legal Analysis
  • Legal institutions can impact the transactions costs of exchange.
  • Interaction between water law and water market transactions.
    • Drought
    • Population pressure
    • Legal change has an observed impact on the number and quantity of water exchanged.
    • Legal structure means that most activity is via one-year leases
  • Example of the application of the NIE to study of the interaction between law and economic behavior.