The article develops a process and control model for the analysis and design of inter-firm relations, in which both opportunism and trust play a role. Its aim is to develop a tool which helps to analyze combinations, balances and imbalances of trust and opportunism, formal and informal forms of governance, and viable sequences of strategies of governance, depending on different conditions. It employs both transaction cost economics and social exchange theory. 1

ore than one commentator has observed that a distinct theory of the firm is conspicuously missing from the main body of Austrian economics (e.g., Langlois 1991, p. 2; Minkler 1991, p. 8). As two Austrian economists observed some years ago: "there is no subjectivist or Austrian theory of the firm " (O'Dris-coll and Rizzo 1985, p. 123). That is still the situation. With the term "theory of the firm, " I shall set forth a theory that has something to say about the existence, the boundaries and the internal organization of the institution known as the business firm. And with the term "firm, " I shall describe an organization that is planned with the express purpose of earning profit. In Hayekian terms (Hayek 1973), the firm is a "planned order, " an aspect of "taxis." That social institutions have always occupied center stage in Austrian economics is a proposition that commands widespread agreement today (Hodgson 1988; Langlois 1986,1991). Many econo-mists recognize the distinctiveness of, for example, the Mengerian theory of the origin of a medium of exchange (Menger 1871, chap. 8), and probably even more economists are familiar with the Hayekian account of the information providing function of the price system (Hayek 1945). Many economists also know that Hayek's insight stemmed from his involvement in the socialist calculation debate, preeminently a debate about the organization of economic activities.

Most insights of environmental economics are in line with the standard neoclassical economic model of rational behaviour, formulated in terms of maximization of utility in general, or profits in particular. The standard theory of environmental policy is a case in point. However, the maximization hypothesis and its methodological foundation have been criticized on many grounds, related to a lack of either logical or empirical content. Moreover, over the years a great many alternative models of behaviour have been proposed. Both criticism and alternatives are surveyed here. In the context of environmental economics behavioural assumptions have been most significant for the development of economic valuation theory and environmental policy theory. The focus here will be on environmental policy theory. 1.

This paper assesses the usefulness and limitations of the notion of bounded rationality for a theory of economic behavior and institutions under uncertainty, in particular if this theory emphasizes institutions. The paper distinguishes the lack of knowledge caused by complexity from fundamental uncertainty, as well as from less strong notions of uncertainty. Next, the relation between bounded rationality and institutions is discussed. With qualifications, the paper criticizes Simon’s theory for focusing on rules of thumb that may be strictly individual and for not paying enough attention to the social context, to habits and to the tacit aspects of institutions. A theory of bounded rationality revised in the light of these criticisms would still be inadequate to study behavior under fundamental uncertainty. The paper then incorporates this type of uncertainty into a discussion of rationality and institutions. It argues against neglecting the connection between innovation and rationality or implying that innovation is not rational. People may use their knowledge to be partly unconventional. Animal spirits and creativity determine whether behavior breaks with the usual way of doing things or not.

This paper proposes an analytical-cum-conceptual framework for understanding the nature of institutions as well as their changes. First, it proposes a new definition of institution based on the notion of common knowledge regarding self-sustaining features of social interactions with a hope to integrate various disciplinary approaches to institutions and their changes. Second, it specifies some generic mechanisms of institutional coherence and change-- overlapping social embeddedness, Schumpeterian innovation in bundling games and dynamic institutional complementarities -- useful for understanding the dynamic interactions of economic, political, social, organizational and cognitive factors.

It is shown that some economic phenomena cannot be studied through models based on the classic scheme of the agent with perfect rationality. They require the construction of models where the agents' bounded cognitive processes are explicitly represented. This goal can be reached through computational models based on a genetic algorithms and neural networks. The strength of this approach is shown through an oligopolistic model in which artificial agents with learning capacity, autonomously develop their price-setting procedures. The results of the simulations show that decision makers, endowed with limited cognitive resources, may evolve toward simple and robust decision rules using less information in more complex environments. Moreover they show how market-price can be strongly influenced by agents' cognitive processes.

This paper is intended to provide a selective yet fairly comprehensive assessment of how several authors associated with the new institutional economics (NIE hereafter) have dealt with some issues pertaining to the theory of economic behaviour under uncertainty. Among the issues selected are: (1) the concept of uncertainty; (2) the influence of institutions on economic behaviour; and (3) the concept of rationality. The paper attempts to contribute to classifying different views on these issues and, thus, to organizing the debate about them. Some recent and significant developments in this debate are considered. In addition to their interest for the theory of economic behaviour per se, all these issues are important for understanding how NIE relates to neoclassical economics, as well as to other alternatives to the latter

Taking value as the socio-economic analogue of biological or cultural fitness, in this paper I start a study of the interaction between individual-level and group-level explanatory mechanisms by looking for what kind of intra-group relationships obtains given the nature of inter-group relationships. Specifically, it is shown that when value comes from appropriating resources from other groups, inter-group relationships are conflictual or war-like and, as a consequence, intra-group-relationships are centralized and hierarchical; when the value creation process involves niche-competition between groups, inter-group relationships are fission-fusion with commitment and intra-group relationships are decentralized and egalitarian; finally, when value comes from appropriating occasional benefits from cooperation, inter-group relationships are indistinguishable from intra-group relationships, and the latter are decentralized and hierarchical. Interpreting intra-group relationships as different forms of social order and the division of labour, applications to political and economic institutions are also provided. Exploitation, a well-defined concept in the paper without recourse to the labour theory of value, is shown to be consistent with some of these institutions and, particularly, with the absence of explicit coercion.

1. Criticism on the standard model of economic behavior Most insights of environmental economics are based on the standard (neoclassical) economic model of rational behavior: constrained maximization of utility or of profits (Baumol and Oates, 1988). The maximization hypothesis and its methodological foundation have, however, been criticized on many grounds – philosophical, theoretical, empirical and experimental (e.g., Caldwell, 1984;

This report should be seen as an extension of the earlier IIASA Interim Report (IR-98-