New institutional economics

New institutional economics

New institutional economics (NIE) is an economic perspective that attempts to extend economics by focusing on the social and legal norms and rules that underlie economic activity.



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 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.[1]

The term 'new institutional economics' was coined by Oliver Williamson in 1975.[2]

Among the many aspects in current NIE analyses are these: organizational arrangements, property rights,[3] transaction costs,[4] 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 Harold Demsetz, Avner Greif, Claude Menard and four Nobel laureates — Ronald Coase,[5] Douglass North,[6] Elinor Ostrom[7] and Oliver Williamson.[8] 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).

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.


  1. ^ 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.
  2. ^ Oliver E. Williamson (1975). Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organization.
  3. ^ Dean Lueck (2008). "property law, economics and," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  4. ^ M. Klaes (2008). "transaction costs, history of," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  5. ^ Ronald Coase (1998). "The New Institutional Economics," American Economic Review, 88(2), p p. 72-74.
  6. ^ 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.
  7. ^ 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.
  8. ^ Oliver E. Williamson (2000). "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, 38(3), pp. 595-613 (press +).


  • Aoki, Masahiko (2001). Toward a Comparative Institutional Analysis. MIT Press. ISBN 0-262-01187-5. 
  • Eggertsson, T. (2005). Imperfect Institutions. Opportunities and Limits of Reform. University of Michigan Press.
  • Furubotn, Eirik G., and Rudolf Richter, ed. (1991). The New Institutional Economics: A Collection of Articles from The Journal of Institutional and Theoretical Economics. Mohr Siebeck. Chapter-preview links.
  • Furubotn, Eirik G., and Rudolf Richter (2005). Institutions and Economic Theory: The Contribution of the New Institutional Economics (Economics, Cognition, and Society). University of Michigan Press, Ann Arbor. Description and Chapter-preview links.
  • Ménard, Claude, ed. (2004), The International Library of the New Institutional Economics, 7 v., Edwar Elgar. Description and contents.
  • _____ and Mary M. Shirley, eds. (2005). Handbook of New Institutional Economics. Springer. Preview.
  • North, D.C. (2005). Understanding the Process of Institutional Change. Princeton University Press.

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