New institutional economics

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New institutional economics (NIE) is an economic perspective that attempts to extend economics by focusing on the social and legal norms and rules (which are institutions) that underlie economic activity and with analysis beyond earlier institutional economics and neoclassical economics.[1] It can be seen as a broadening step to include aspects excluded in neoclassical economics. It rediscovers aspects of classical political economy.


NIE has its roots in two articles by Ronald Coase, "The Nature of the Firm" (1937) and "The Problem of Social Cost" (1960). In the latter, the Coase Theorem (subsequently so termed) maintains that without transaction costs alternative property right assignments can equivalently internalize conflicts and externalities. Therefore, comparative institutional analysis arising from such assignments is required to make recommendations about efficient internalization of externalities [2] and institutional design, including Law and Economics.

At present NIE analyses are built on a more complex set of methodological principles and criteria. They work within a modified Neoclassical framework in considering both efficiency and distribution issues, in contrast to "traditional," "old" or "original" institutional economics, which is critical of mainstream neoclassical economics.[3]

The term 'new institutional economics' was coined by Oliver Williamson in 1975.[4]

Among the many aspects in current NIE analyses are these: organizational arrangements, property rights,[5] transaction costs,[6] credible commitments, modes of governance, persuasive abilities, social norms, ideological values, decisive perceptions, gained control, enforcement mechanism, asset specificity, human assets, social capital, asymmetric information, strategic behavior, bounded rationality, opportunism, adverse selection, moral hazard, contractual safeguards, surrounding uncertainty, monitoring costs, incentives to collude, hierarchical structures, bargaining strength, etc.

Major scholars associated with the subject include Armen Alchian, Harold Demsetz,[7][8] Steven N. S. Cheung,[9][10] Avner Greif, Yoram Barzel, Claude Menard (economist) and four Nobel laureates — Ronald Coase,[11][12] Douglass North,[13][14] Elinor Ostrom[15] and Oliver Williamson.[16] A convergence of such researchers resulted in founding the International Society for New Institutional Economics in 1997.

Institutional levels

Although no single, universally accepted set of definitions has been developed, most scholars doing research under the NIE methodological principles and criteria follow Douglass North's demarcation between institutions and organizations. 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 (institutional frameworks).[17]

Organizations, by contrast, are those groups of people and the governance arrangements they create to coordinate their team action against other teams performing also as organizations. Firms, Universities, clubs, medical associations, unions etc. are some examples.

Because some institutional frameworks are realities always "nested" inside other broader institutional frameworks, this clear demarcation is always blurred in actual situations. A case in point is a University. When the average quality of its teaching services must be evaluated, for example, a University may be approached as an organization with its people, physical capital, the general governing rules common to all that were passed by the University governing bodies etc. However, if the task consists of evaluating people's performance in a specific teaching department, for example, along with their own internal formal and informal rules, then the University as a whole enters the picture as an institution. General University rules, then, form part of the broader institutional framework influencing people's performance at the said teaching department.

See also


  1. Malcolm Rutherford (2001). "Institutional Economics: Then and Now," Journal of Economic Perspectives, 15(3), pp. 185-90 (173-194).
    L. J. Alston, (2008). "new institutional economics," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  2. Rita Yi Man Li (2012). THE INTERNALISATION OF ENVIRONMENTAL EXTERNALITIES AFFECTING DWELLINGS: A REVIEW OF COURT CASES IN HONG KONG," Economic Affairs, Volume 32, Issue 2, pages 81–87, June 2012, [1].
  3. Warren Samuels ([1987] 2008). "institutional economics" The New Palgrave Dictionary of Economics Abstract. A scholarly journal particularly featuring traditional institutional economics is the Journal of Economic Issues; see article-abstract links to 2008. Scholarly journals particularly featuring the new institutional economics include the Journal of Law Economics and Organization, the Journal of Economic Behavior and Organization, and the Journal of Law and Economics.
  4. Oliver E. Williamson (1975). Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organization.
  5. Dean Lueck (2008). "property law, economics and," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  6. M. Klaes (2008). "transaction costs, history of," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  7. Harold Demsetz (1967). "Toward a Theory of Property Rights," American Economic Review, 57(2), pp. 347-359.
  8. Harold Demsetz (1969) "Information and Efficiency: Another Viewpoint," Journal of Law and Economics, 12(1), pp. [2].
  9. Steven N. S. Cheung (1970). "The Structure of a Contract and the Theory of a Non-Exclusive Resource," Journal of Law and Economics, 13(1), pp. 49-70.
  10. S. N. S. Cheung (1973). "The Fable of the Bees: An Economic Investigation," Journal of Law and Economics, 16(1), pp. 11-33.
  11. Ronald Coase (1998). "The New Institutional Economics," American Economic Review, 88(2), pp. 72-74.
  12. R. H. Coase (1991). "The Institutional Structure of Production," Nobel Prize Lecture PDF, reprinted in 1992, American Economic Review, 82(4), pp. 713-719.
  13. Douglass C. North (1990). Institutions, Institutional Change and Economic Performance, Cambridge University Press.
  14. Douglass C. North (1995). "The New Institutional Economics and Third World Development," in The New Institutional Economics and Third World Development, J. Harriss, J. Hunter, and C. M. Lewis, ed., pp. 17-26.
  15. Elinor Ostrom (2005). "Doing Institutional Analysis: Digging Deeper than Markets and Hierarchies," Handbook of New Institutional Economics, C. Ménard and M. Shirley, eds. Handbook of New Institutional Economics, pp. 819-848. Springer.
  16. Oliver E. Williamson (2000). "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, 38(3), pp. 595-613 (press +).
  17. Rita Yi Man Li (2014). "The Institutional Analysis of Fittings in Residential Units in Law, Economics and Finance of the Real Estate Market 2014, pp 45-61" [3].

Further reading

  • Eggertsson, Thráinn (2005). Imperfect Institutions: Possibilities and Limits of Reform. Ann Arbor: University of Michigan Press. ISBN 0472114565.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
  • Furubotn, Eirik G.; Richter, Rudolf (2005). Institutions and Economic Theory: The Contribution of the New Institutional Economics (2nd ed.). Ann Arbor: University of Michigan Press. ISBN 0472030256.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>

External links