Institutional forms, part 1

de Carliss Y. Baldwin

This is the first of a series of papers that investigates the institutional forms that can arise and be sustained by a "technology of design." This paper sets up our "model world" in terms of its technology, actors and larger context. In subsequent papers, we will define three institutional forms in relation to the technology and actors of the model world: A "Guild," which might also be called a professional association; A Monopolistic firm; and A Cluster of firms. We will evaluate the effectiveness of each institutional form and characterize its equilibrium behavior alone and in competition with the other forms. In this paper, we first characterize a technology of design activity and a class of agents (designers). The design technology, which is based on experimentation, is is strongly associated with modular designs, although it can arise in other contexts as well. We then define an economic environment that "puts the designers to work," but causes their efforts to be separate and uncoordinated. In that "Base Case environment," we show how the pooling of design solutions and the coordination of designers'efforts generates a (potentially large) surplus for both designers and society. Thus, we argue, institutions are needed to support pooling and provide coordination. How particular institutions fulfill those roles and allocate the surplus thereby generated aretopics addressed in the later papers of this series.