Glossary

Asset specificity is where a productive asset is largely limited to one specific use. Where investments in such assets are non-trivial, considerable effort will be made to arrange transactions that will provide continuity in the use of the asset. Without continuity it may not be possible to achieve a positive return on the investment. Fishing technology, for example, requires significant investments, and once these have been made these assets cannot easily be transferred to other uses. The owners of such technology will therefore seek contracts that will guarantee them access to a level of fisheries resources that will at least enable them to cover their investment costs. The negotiation and enforcement of such contracts raises the level of transaction costs. Many investments aimed at improved natural management involve expenditure on assets that cannot easily be transferred to other uses. Examples include water conservation technologies, such as canal lining, reservoirs, irrigation control gates, and drainage; soil conservation technologies, such as terracing and walls; some of the investment in human capital and environmental management skills. Appropriate institutional mechanisms are required in order to ensure an adequate ‘return’ on such assets. Without such institutions the ‘returns’ will not warrant the initial investment and investment incentives will be minimal.

Asymmetric information occurs where access to information by one party (or parties) to a transaction is better than access by another party. Asymmetric information can be used as a source of power in determining the outcome of the transaction. . A common example is where the seller of a good knows much more about the characteristics of that good than the buyer (see also Imperfect Information)

Bounded rationality is the condition in which decision making is motivated by the desire to maximise economic benefits, whilst being limited by imperfect information. It is a condition in which individuals are intendedly rational, but are subject to limited cognitive competence as a result of imperfect information.

Common pool resources (CPR) are characterised by the difficulty of excluding actors from using them and the fact that the use by one individual or group means that less is available for use by others. (The latter point distinguishes CPR from pure public goods which exhibit both non excludability and non rivalry in consumption). CPRs include some fisheries, irrigation systems and grazing areas.

Common Property Rights Regime refers to a particular definition of property rights over a resource or asset where ownership is by an identified group, rather than an individual. Such regimes are often the most appropriate for ensuring optimal use of Common Pool resources.

Externalities exist where the activities of those actors party to a transaction affect (either positively or negatively) a third party and no account is made of that effect in terms of payment or compensation. Externalities are an example of market failure due to a weak definition of property rights over an asset.

Fixed costs (of transaction) refer to any costs that do not vary in proportion with the scale of an economic activity and are thus higher per unit transacted for smaller scales of activity.

Imperfect information. In a world in which information is imperfect, the cost of obtaining information is positive, and where resources are scarce, the measurement, monitoring and enforcement of contracts are unlikely to be perfect. So long as information is not perfect, economic agents engaged in transactions will have to submit to a certain amount of uncertainty. Uncertainty can be reduced by devoting more time and resources to measuring, monitoring and enforcement, and, in general, the greater the perceived uncertainty, the more resources will have to be devoted to these activities if transactions are to take place. Where these activities are unable to reduce uncertainty sufficiently, or where the cost of doing so is too high, new, innovative institutions for and ways of conducting measurement, monitoring and enforcement and reducing their associated transaction costs will have to be found. Otherwise transactions will not occur.

Institutions are defined as the formal or informal rules governing peoples’ and organisations’ behaviour. Institutions, ‘the rules of the game’, are distinguished from organisations which, along with individuals, are considered as ‘players in the game’. Formal institutions (such as by-laws, national laws, policies, the national constitution, and international laws and treaties) are part of the institutional environment and distinct from institutional arrangements. For informal institutions (such as social customs and conventions), the distinction may not always be so clear. However, widespread acceptance of particular institutional arrangements as the norm can mean that in effect they become part of the institutional environment.

Institutional arrangements are defined as the forms of contract or arrangement that are set up for particular transactions or holding of assets.

Institutional environment is defined as the broader set of institutions (or ‘rules of the game’) within which people and organisations develop and implement specific institutional arrangements

Non-market transaction refers to an exchange of rights over the ownership and/or use of an asset or good that does not involve a market exchange.

Opportunism is ‘a condition of self-interest seeking with guile’ which is permitted by asymmetric information whereby one party to a contract has information that the other party does not. It too arises as a consequence of imperfect information. Opportunistic behaviour, occurs where one party to a contract takes advantage of his superior knowledge, in order to further his interests, by failing to disclose such information to the other contracting party. This would occur, for example, if a supplier of pesticide had information about a product which was deliberately withheld from the potential buyer, in the knowledge that such information would negatively affect the price of the product or the willingness of the buyer to purchase it. This type of opportunistic behaviour causes what is known in the NIE literature as adverse selection, and generally takes place ex-ante the contract as a result of imperfect measurement. Opportunism can also occur ex-post, when one party, the principal, to the contract is unable to monitor and enforce the performance in meeting contracted obligations of the other party, the agent. This is sometimes known as moral hazard or the principal-agent problem, and reduces the incentive for agents to fulfil their contractual obligations, thereby leading to shirking or free riding

Path dependence refers to the institutions at one place in time being determined by their evolution from earlier institutions. It is defined by North as "a term used to account for the parallel characteristic of an institutional framework that has shaped downstream institutional choices and in consequence makes it difficult to alter the direction of an economy once it is on a particular institutional path. The reason is that the organizations of an economy and the interest groups they produce are a consequence of the opportunity set provided by the existing institutional framework. The resulting complementarities, economies of scope and network externalities reflect the symbiotic interdependence among the existing rules, the complementary informal constraints, and the interests of members of organizations created as a consequence of the institutional framework. In effect, an institutional matrix creates organizations and interest groups whose welfare depends on that institutional framework". Definition taken from North, D (1997) The Contribution of the New Institutional Economics to an Understanding of the Transition Problem. 1997 UNU/WIDER Annual Lecture
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Property rights are the legally defined and enforceable rights which relate to ownership and use of resources. (See article in Bibliography for further detail)

Risk aversion describes a situation where actors are either unwilling to engage in a transaction for fear that it will fail, leaving them with some form of financial loss, or adopt institutional arrangements with high transaction costs to reduce the probability of such a loss, even though the extra costs incurred in avoiding the loss are greater than the average benefits expected from avoiding the loss.

Transaction refers to the activities that allow/constrain transformation activities. A transaction occurs when two or more parties enter into a contract in which rights and obligations are exchanged. Transactions range from those where all the rights and obligations under the contract take place at a single instant in time, with no rights or obligations remaining outstanding after the instant in time has passed (this is the purest form of spot market transaction) to those which involve a continuous exchange in which reciprocal rights and obligations are part of a permanent contractual arrangement, with no specific termination point - such as in the case of the long-term relationship between landlords and tenants, between plantation owners and their permanent employees, or between a fisheries management authority and individual fishermen. Transactions also include those activities required to define, implement and enforce a given set of property rights over an asset.

Transaction costs are the costs associated with the transactions that are necessary for transformation activity to occur. These costs can be usefully divided into ex-ante costs and ex-post costs. Ex-ante costs involve the costs associated with gathering information about an asset or the good or service derived from its use, and about the other parties involved and the negotiating of and devising a contract or set of rights in such a way as to maximise the likelihood of the contracting partners meeting their obligations under the contract. Measurement costs are an important part of the ex-ante cost of a transaction. These are the costs involved in gathering information about the attribute of a commodity or service that is to be the object of a contract and about the reliability and trustworthiness of other parties to the contract. A fisheries management authority needs to obtain information about the state of the natural resource base, as well as about fishermen, before it enters into a contract with fishermen entailing the allocation of fishing rights and the provision of management services in exchange for the undertaking by fishermen to abide by certain rules and regulations. Without such information the objectives of fisheries management are unlikely to be realised. Ex-post costs are those associated with monitoring the performance of any contract or set of property rights associated with the use or exchange, to ensure that the contracting partner is meeting his/her obligations that are incurred once a contract has been negotiated and agreed, and where a transaction is extended over time, and enforcing contracts where the contracting partner fails to meet the obligations stipulated in the agreement. Enforcement costs are incurred when a party to a contract strays from the obligations laid down in the agreement, and are associated with measures taken by the aggrieved party to rectify matters. The exclusion of parties from using resources where ownership is defined to others is another example of an ex-post cost.

Transformation in the context of NIE refers to the physical process by which inputs are converted into outputs. For example, a production technology utilises labour, in combination with other resources, to produce rice.