Institutions and markets

David Zetland at Aguanomics ponders the interplay of institutions and markets (reposted with authors permission). LocaL conditions in this context are those conditions in a watershed area.

This is what I mean by institutions

I wrote this for some partners on our water project, and I post it here because it seems to give a nice perspective on what we mean by institutions and how to form markets in accord with local conditions.

This section will discuss the potential for using water markets or auctions in the Tajo-Segura basins, along with the institutional details affecting the potential for the successful implementation of markets. Institutional details are important, because they tend to change the nature of markets, making it important to include details in the design and implementation of markets that reflect institutional conditions.

Institutions can take many forms, from the resilient and resistant institutions of culture, to the formal and informal practices of law, to the day-to-day interactions of an evolving population (Williamson 2000). History creates institutions (via path dependency), but history is not destiny. Ideas and actions can change institutions that no longer serve the needs of society.

The discussion in this section is meant to inform the reader of institutions affecting potential markets or auctions for water in the basins, suggest some ways to include those details in the design of markets, and promote a discussion and further investigation of institutions (via experiments and focus groups, for example) that may help or hinder the adoption of markets – assuming markets are accepted as a good idea. Interested readers may want to read earlier EPI-Water case studies where institutions play a big role in markets, e.g., Donoso (2012), Howe (2012), Keiser and McCarthy (2012) and Young (2012).

As with those case studies, this case study uses structured interviews to clarify the often complex interplay among official and informal institutions, enforced or not. We spoke with four experts over the phone, asking them to describe the same conditions and issues from their different perspectives. Some of those perspectives are integrated into the body of this paper, others are not if they do not have sufficient justification or authority. We have also used these conversations to improve the accuracy of the descriptions here, but there may be errors in either fact or interpretation.
We suggest reading through this chapter with the description of the problems, situation and potential solutions, then reading the statements of the stakeholders* before considering yourself how sensible is the description of the institutions of interest and suggested form of markets. Institutions, like markets, can take many forms, and their form should balance among social preferences for economic, environmental and distributional outcomes.

Here’s the draft paper [PDF].
* Stakeholder statements were removed, due to their fear of being misinterpreted having their words held against them or their organizations.