New Institutional Economics
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New Institutional Economics (NIE) is an economic perspective that attempts to extend economics by focusing on the
institution Institutions are humanly devised structures of rules and norms that shape and constrain individual behavior. All definitions of institutions generally entail that there is a level of persistence and continuity. Laws, rules, social conventions a ...
s (that is to say the social and legal norms and rules) that underlie economic activity and with analysis beyond earlier
institutional economics Institutional economics focuses on understanding the role of the Sociocultural evolution, evolutionary process and the role of institutions in shaping Economy, economic Human behavior, behavior. Its original focus lay in Thorstein Veblen's instin ...
and neoclassical economics. Unlike neoclassical economics, it also considers the role of culture and classical political economy in economic development. The NIE assume that individuals are rational and that they seek to maximize their preferences, but that they also have cognitive limitations, lack complete information and have difficulties monitoring and enforcing agreements. As a result, institutions form in large part as an effective way to deal with transaction costs. NIE rejects that the state is a neutral actor (rather, it can hinder or facilitate effective institutions), that there are zero transaction costs, and that actors have fixed preferences.


Overview

It 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 (as it was subsequently termed) maintains that without transaction costs, alternative property right assignments can equivalently internalize conflicts and externalities. Thus, comparative institutional analysis arising from such assignments is required to make recommendations about efficient internalization of externalities and institutional design, including Law and Economics. Analyses are now built on a more complex set of methodological principles and
criteria Criterion, or its plural form criteria, may refer to: General * Criterion, Oregon, a historic unincorporated community in the United States * Criterion Place, a proposed skyscraper in West Yorkshire, England * Criterion Restaurant, in London, Eng ...
. They work within a modified neoclassical framework in considering both efficiency and distribution issues, in contrast to "traditional", "old" or "original"
institutional economics Institutional economics focuses on understanding the role of the Sociocultural evolution, evolutionary process and the role of institutions in shaping Economy, economic Human behavior, behavior. Its original focus lay in Thorstein Veblen's instin ...
, which is critical of mainstream neoclassical economics. The term 'new institutional economics' was coined by Oliver Williamson in 1975. Among the many aspects in current analyses are organizational arrangements (such as the boundary of the firm), property rights, transaction costs, credible commitments, modes of governance, persuasive abilities, social norms, ideological values, decisive perceptions, gained control, enforcement mechanism, asset specificity,
human assets Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial ...
,
social capital Social capital is "the networks of relationships among people who live and work in a particular society, enabling that society to function effectively". It involves the effective functioning of social groups through interpersonal relationships ...
,
asymmetric information In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. Information asymmetry creates an imbalance of power in transactions, which can ...
, strategic behavior,
bounded rationality Bounded rationality is the idea that rationality is limited when individuals make decisions, and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal. Limitations include the difficulty of ...
, opportunism, adverse selection, moral hazard, contractual safeguards, surrounding uncertainty, monitoring costs, incentives to collude, hierarchical structures, and
bargaining In the social sciences, bargaining or haggling is a type of negotiation in which the buyer and seller of a good or service debate the price or nature of a transaction. If the bargaining produces agreement on terms, the transaction takes plac ...
strength. Major scholars associated with the subject include
Masahiko Aoki Masahiko Aoki (April 1, 1938 – July 15, 2015) was a Japanese economist, Tomoye and Henri Takahashi Professor Emeritus of Japanese Studies in the Economics Department, and Senior Fellow of the Stanford Institute for Economic Policy Research and ...
, Armen Alchian, Harold Demsetz,
Steven N. S. Cheung Steven Ng-Sheong Cheung ( born December 1, 1935) is a Hong Kong-born American economist who specializes in the fields of transaction costs and property rights, following the approach of new institutional economics. He achieved his public fame wi ...
,
Avner Greif Avner Greif (; born 1955) is an economics professor at Stanford University, Stanford, California. He holds a chaired professorship as Bowman Family Professor in the Humanities and Sciences. Greif received his PhD in Economics at Northwestern Un ...
, Yoram Barzel, Claude Ménard (economist),
Daron Acemoglu Kamer Daron Acemoğlu (; born September 3, 1967) is a Turkish-born American economist who has taught at the Massachusetts Institute of Technology (MIT) since 1993. He is currently the Elizabeth and James Killian Professor of Economics at MIT. H ...
, and four Nobel laureates— Ronald Coase,
Douglass North Douglass Cecil North (November 5, 1920 – November 23, 2015) was an American economist known for his work in economic history. He was the co-recipient (with Robert William Fogel) of the 1993 Nobel Memorial Prize in Economic Sciences. In the wor ...
, Elinor Ostrom, and Oliver Williamson. A convergence of such researchers resulted in founding the Society for Institutional & Organizational Economics (formerly the International Society for New Institutional Economics) in 1997. The NIE has influenced scholars outside of economics, including
historical institutionalism Historical institutionalism (HI) is a new institutionalist social science approach that emphasizes how timing, sequences and path dependence affect institutions, and shape social, political, economic behavior and change. Unlike functionalist the ...
, influential works on U.S. Congress (e.g. Kenneth Shepsle, Barry Weingast), international cooperation (e.g. Robert Keohane,
Barbara Koremenos Barbara Koremenos is an American Professor of Political Science at the University of Michigan. She is known for her research in the field of international relations, in particular on international organizations and international agreements. Her work ...
), and the establishment and persistence of electoral systems (e.g. Adam Przeworski). Robert Keohane was influenced by NIE, resulting in his influential 1984 work of International Relations, ''After Hegemony: Cooperation and Discord in the World Political Economy''. Herbert A. Simon criticized NIE for solely explaining organizations through market mechanisms and concepts drawn from neoclassical economics. He argued that this led to "seriously incomplete" understandings of organizations. Jack Knight and Terry Moe have criticized the functionalist components of NIE, arguing that NIE misses the coercion and power politics involved in establishing and maintaining institutions.


Institutional levels

Although no single, universally accepted set of definitions has been developed, most scholars doing research under the methodological principles and criteria follow
Douglass North Douglass Cecil North (November 5, 1920 – November 23, 2015) was an American economist known for his work in economic history. He was the co-recipient (with Robert William Fogel) of the 1993 Nobel Memorial Prize in Economic Sciences. In the wor ...
's demarcation between
institutions Institutions are humanly devised structures of rules and norms that shape and constrain individual behavior. All definitions of institutions generally entail that there is a level of persistence and continuity. Laws, rules, social conventions a ...
and organizations. Institutions are the "rules of the game", 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 that they create to co-ordinate their team action against other teams performing also as organizations. To enhance their chance of survival, actions taken by organizations attempt to acquire skill sets that offer the highest return on objective goals, such as
profit maximization In economics, profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit (or just profit in short). In neoclassical economics, w ...
or voter turnout. Firms, universities, clubs, medical associations, and unions are some examples. Oliver Williamson characterizes four levels of social analysis. The first concerns itself with social theory, specifically the level of embeddedness and informal rules. The second is focused on the institutional environment and formal rules. It uses the economics of property rights and positive political theory. The third focuses on governance and the interactions of actors within transaction cost economics, "the play of the game". Williamson gives the example of contracts between groups to explain it. Finally, the fourth is governed by neoclassical economics, it is the allocation of resources and employment. New Institutional Economics is focused on levels two and three. Because some institutional frameworks are realities always "nested" inside other broader institutional frameworks, the clear demarcation is always blurred. 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 its 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, it, as a whole, enters the picture as an institution. General rules, then, form part of the broader institutional framework influencing the people's performance at the said teaching department.


See also

* Horizontal integration * Public choice * Vertical integration


References


Further reading

* *


External links


SIOE
- Society for Institutional & Organizational Economics, formerly the International Society for New Institutional Economics.
ESNIE
- European School on New Institutional Economics.
ASNIE
- Austrian Society for New Institutional Economics.

- The Ronald Coase Institute

- Founded by Mancur Olson, University of Maryland.
Contracting and Organizations Research Center
University of Missouri
Economics and Institutions WEBSITE
- by prof. F. Toboso, University of Valencia, Spain.
"The Rise of New Institutional Economics and Assessment its Contributions to the Post Washington Consensus"
{{DEFAULTSORT:New Institutional Economics Schools of economic thought