We begin by introducing what we refer to as the naive theory of property rights and its application in several areas. The naive theory looks at the e… - Þráinn Eggertsson

This book grew out of my interest in organizational forms and institutional arrangements and their impact on economic outcomes. Price theory or microeconomics, in its conventional form, treats organizations and institutions the same way as it treats the law of gravity: These factors are implicitly assumed to exist but appear neither as independent nor as dependent variables in the models. Such economy in model making can be eminently reasonable. It enables us to isolate critical relationships and simplifies the use of mathematical tools in the analysis. However, unlike the law of gravity, organizations and institutions are not invariant; they vary with time and location, with political arrangements and structures of property rights, with technologies employed, and with physical qualities of resources, commodities, and services that are exchanged. In fact, production involves not only the physical transformation of inputs into outputs but also the transfer of property rights between the owners of resources, commodities, and labor services. In the transfer of rights, whether within firms or across markets, agents maximize their objective functions subject to the constraints of organizations and institutions.

Modern theory identifies several sources of economic growth, such as capital accumulation, new techniques, secure property rights and contracts, and absence of rent seeking. This paper introduces new social technologies as yet another source of growth and emphasizes our incomplete knowledge of social systems. I introduce a framework for analyzing institutional policy and use the case of modern biotechnology to explain how uncertainty about social technologies, persuasion, and competing beliefs influence the evolution of property rights.

Without the state, its institutions, and supportive framework of property rights, high transaction costs will paralyze complex production systems, and specific investments involving long-term exchange relationships will not be forthcoming.