Information as an external coordination signal

Consider the classical representation of a set of agents willing to exchange certain goods for other goods. They enter with their own initial resources and with given preferences about the goods. They have no permanent relations which might favor some transactions over others. They are assumed to share a common taxonomy of goods and to be able to observe a limited number of data. They are considered to be cognitively rational insofar as that they have a simplified, but sufficient view of their environment. They are considered to be instrumentally rational as long as they are able to optimize the quantity of desired exchanges. Moreover, the exchange of goods between the agents is an operation often assumed to involve no cost.

The main theoretical problem is to coordinate these heterogeneous agents through a commonly accepted institutional device. A standard assumption prescribes that the institution should neither impose physical constraints on the agents' transactions nor modify their preferences structurally. Consequently, the institution is assumed exclusively to produce informational signals influencing the parameters of the agents' constraints and preferences. Concretely, an institution may be represented by an external entity, fictitious or not, capable of realizing an equilibrium. An equilibrium state is achieved when the agents can see no further possibilities of fruitful bilateral exchange. It is obtained by a fixed point of the loop relating the institutional signals to the individual exchanges.

The main institution is the 'competitive market', in which all transactions are coordinated by a single type of signal: the price defined for each good. The price system is computed by a 'Walrasian auctioneer'

7.3 Information as an external coordination signal 135

who is in contact with all the agents. In fact, a competitive equilibrium is obtained under three conditions. Each agent fixes optimally his supply or demand for each good as a function of prices (instrumental rationality). The Walrasian auctioneer fixes the price of each good by equalizing the supply and demand (institutional coordination). Each agent observes the current prices and reasons from them (cognitive rationality). In some cases, in a fish market or a financial market, the Walrasian auctioneer is a real entity. More often, it is just a fictitious entity which acts 'as if' comparing supply and demand.

The attainment of an equilibrium state raises three fundamental problems concerning the Walrasian auctioneer. The 'implementation problem' stems from the necessary existence of a concrete auctioneer or a suitable alternative. The 'synchronicity problem' originates in the fact that the auctioneer has to fix the prices at the same time as the agents fix their supply and demand. The 'selection problem' arises when several equilibrium price systems satisfy the equilibrium requirements. An eductive solution to the two first problems (see 7.8) considers that the agents are able to simulate the computation of prices by the auctioneer and to form 'rational expectations' on these prices. However, the third problem remains, since the agents have to coordinate on the same rational expectation in the event of multiplicity.

Some institutions are designed to be complementary to the market. 'money', for instance, helps to fluidify transactions, because it defines a common value standard which enables exchanges to be carried out exclusively between goods and money. Likewise, 'trust' helps to secure transactions, since it ties together exchanges which are respective counterparts but which do not take place at exactly the same moment. In other respects, 'warranties of quality' ensure that a good has commonly-known characteristics while 'antitrust laws' prevent specific agents from acquiring too much market power. More generally, 'exchange rules' fix the types of goods one is allowed to exchange (excluding, for instance, child labor or human organs).

Some other institutions appear as substitutes to the market. For example, a 'planning mechanism' is used for goods which cannot easily be treated by a competitive market (public goods, goods with increasing returns), the planner playing the role of the concrete coordination entity. Likewise, an 'auction mechanism' confronts a seller and a buyer of a specific good in an asymmetric way, the seller being simultaneously an agent and the concrete coordination entity. Finally, a 'negotiation process' may be directly implemented by the seller and buyer of a good in order to determine its exchange price bilaterally somewhere between its cost and its utility.

The employer and the employee may agree on a first type of employment contract called a 'sales contract'. The employer defines a precise task for the employee with a corresponding wage. Any modification in the task or even in its context corresponds to a new contract with a new wage. A sales contract has a market flavor, since it considers egalitarian agents and tries to define the wage of labor considered as a specific 'good'. The contract is generally incomplete because the task and its context cannot be defined in enough detail. In fact, a sales contract can be considered a basic institution which can be iterated and combined in order to form more complex institutions. For instance, a job market is sometimes considered as the superposing of bilateral sales contracts between employers and employees, coordinated by a common wage for a similar task. But such a mode of coordination involves high transaction costs.

Home Business Training Guide

Home Business Training Guide

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