Everything about New Institutional Economics totally explained
New institutional economics (NIE) is an
economic perspective that attempts to extend economics by focusing on the
social and
legal norms and
rules that underly economic activity. Although NIE has its roots in
Ronald Coase's fundamental insights about the critical role of institutional frameworks and
transaction costs for economic performance, at present NIE analyses are built on a more
complex set of
methodological principles and
criteria. They now depart from both mainstream
Neoclassical economics and "old"
institutional economics, though
authors often care about both efficiency and distribution issues.
Among the many concepts/aspects that are often taken into account in current NIE analyses these can be mentioned: organizational arrangements,
transaction costs, 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 this school include
Ronald Coase,
Douglass North,
Oliver Williamson,
Avner Greif,
Claude Menard and
Thrainn Eggertsson, to mention but a few. In
1997 they founded the
International Society for New Institutional Economics.
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 deparment.
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