Does Institutional Economics Add to Our Understanding of Transportation? Air Transport Policy as an Example

Abstract

The award of the 2009 Nobel Prize in economics to Oliver Williamson for "his analysis of economic governance, especially the boundaries of the firm" highlights the importance now attached to the new institutional economics. The amount of work on transportation organizations explicitly using the tools of new institutional economics is, however, sparse and there is a tendency to continue to rely exclusively on conventional neo-classical economic orthodoxy. But the role of such things as governance, transactions costs, social norms, moral hazard, adverse selection, and property rights are clearly important in the ways that transportation organizations function and interact with one another. This paper looks, as an example, at some of situations where the NIE may shed light on the behavior of various organizations that supply or regulate air transportation services under a variety of institutional conditions. In the NIE, institutions are the “rules of the game”, consisting of both the formal legal rules and the informal social norms that govern individual behavior and structure social interactions whereas, organizations are those groups of people, and the governance arrangements they create, when coordinating their team actions against other teams performing also as organizations. For example, one can think of how the Ryanair “organization” acts in relations to other airline “organizations” within the existing set of legal “institutions” established by the European Union, or why airlines like United and Continental merge and the form mergers take.