Institutional Innovation (Part I)

A flimsy transparency introducing the title of the talk was placed on an old-fashioned overhead projector in Gleacher Hall at the University of Chicago. The organizers of the conference had purposefully chosen a low-tech teaching tool. Institutional innovation is itself a very disruptive idea: a compelling story best told without PowerPoint. I was to address guests of the Ronald Coase Institute. We discussed the evolution of institutional innovation and how these innovations have helped to form the intellectual basis for environmental markets and the Chicago Climate Exchange. The institute and its members provided a most fitting audience, as its principles and the ideas of one of the greatest thinkers of the 20th century — Nobel prize–winning economist Sir Ronald Coase — on the significance of transaction costs and property rights provide the intellectual basis for environmental markets. This column shares some points of that discussion and provides three examples of such institutional innovations leading up to the current market for carbon dioxide (CO2)…