Dysfunction of the Rules and Institutional Effectiveness

Abstract:

The purpose of the study is to determine the possible relationship of the institutional effectiveness, which is understood as the number of executable functions per unit of transaction costs and dysfunction understood as the disorder, non-performance a certain number of functions arising for various reasons in respect to institutions, agents, systems, as well as individual functions. I use the structural-functional research method, which allows to give the measuring interpretation at the theoretical level of analysis, based on the definition of concepts, as well as at the formal level to relate the expected change of the studied values. I propose the theoretical model of connection between dysfunction and institutional effectiveness, which shows that the disorder of the introduced rules’ functions may reduce the quality of functioning. But some efficiency will be ensured at the same time. Some of the rules are executed for this level of costs. On that basis, the frequency and content of changes in institutions affect the quality of development, changes in the level of welfare of both individual agents, and the economy as a whole. This effect is shown in the example used by R. Coаsе in substantiating the ‘theorem’ formulated by G. Stigler, namely the interaction between a cattleman and a farmer, when running the herd on crops causes damage to the farmer, acting as the negative externality. There is considered the economy of two agents, whose welfare depends on how many times they drive the cattle out, the distribution of ownership to the girder, the initial and changeable values of institutional effectiveness, and the dysfunction of agents. I have obtained the result that the largest value of institutional effectiveness does not correspond to the smallest dysfunction value in all cases, with the considered method of determining these parameters. I propose the method for assessing the dysfunction profile of an institution or agent, expanding the possibilities of applying functional analysis within the framework of institutional economic theory. I show the possible relationship between the magnitude of the benefits created by interacting agents and institutional effectiveness. It is shown that even the equal-zero situation of transaction costs does not take into account the ‘functional competence’ of agents that can affect the effectiveness of the property rights used. Therefore, in this case, the distribution of rights will affect the value and structure of production. In the case of non-zero transaction costs, this effect becomes decisive in assessing the dynamics of welfare and the effectiveness of the contractor.

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