New Institutional Economics (NIE) is an economic perspective that attempts to extend economics by focusing on the institutions (that is to say the social and legal norms and rules) that underlie economic activity and with analysis beyond earlier institutional economics and neoclassical economics.[1]

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.[2]

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.[3]


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. 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.[4]

The term 'new institutional economics' was coined by Oliver Williamson in 1975.[5][6]

Among the many aspects in current analyses are organizational arrangements (such as the boundary of the firm), property rights,[7] transaction costs,[8] 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, and bargaining strength.

Major scholars associated with the subject include Masahiko Aoki, Armen Alchian, Harold Demsetz,[9][10] Steven N. S. Cheung,[11][12] Avner Greif, Yoram Barzel, Claude Ménard (economist), Daron Acemoglu, and four Nobel laureates—Ronald Coase,[13][14] Douglass North,[15][16] Elinor Ostrom,[17] and Oliver Williamson.[18][19][20] A convergence of such researchers resulted in founding the Society for Institutional & Organizational Economics (formerly the International Society for New Institutional Economics) in 1997.[21] The NIE has influenced scholars outside of economics, including historical institutionalism, influential works on U.S. Congress (e.g. Kenneth Shepsle, Barry Weingast), international cooperation (e.g. Robert Keohane, Barbara Koremenos), and the establishment and persistence of electoral systems (e.g. Adam Przeworski).[22] 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.[23]

Herbert A. Simon criticized NIE for solely explaining organizations through market mechanisms and concepts drawn from neoclassical economics.[24] He argued that this led to "seriously incomplete" understandings of organizations.[24] 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.[25][26][27]

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's demarcation between institutions 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 or voter turnout.[28] 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.[29]

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


  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. ^ Powell, Walter W.; DiMaggio, Paul J. (1991). The New Institutionalism in Organizational Analysis. University of Chicago Press. doi:10.7208/chicago/9780226185941.001.0001. ISBN 978-0-226-67709-5.
  3. ^ North, Douglass Cecil (1981). "6". Structure and Change in Economic History. Norton. ISBN 978-0-393-01478-5.
  4. ^ 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 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.
  5. ^ Oliver E. Williamson (1975). Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organization.
  6. ^ Coase, Ronald (2002), Brousseau, Eric; Glachant, Jean-Michel (eds.), "The New Institutional Economics", The Economics of Contracts: Theories and Applications, Cambridge University Press, pp. 45–48, doi:10.1017/cbo9780511613807.002, ISBN 978-0-521-89313-8
  7. ^ Dean Lueck (2008). "property law, economics and," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  8. ^ M. Klaes (2008). "transaction costs, history of," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  9. ^ Harold Demsetz (1967). "Toward a Theory of Property Rights," American Economic Review, 57(2), pp. 347-359[dead link].
  10. ^ Harold Demsetz (1969) "Information and Efficiency: Another Viewpoint," Journal of Law and Economics, 12(1), pp. [1][dead link].
  11. ^ 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.
  12. ^ S. N. S. Cheung (1973). "The Fable of the Bees: An Economic Investigation," Journal of Law and Economics, 16(1), pp. 11-33.
  13. ^ Ronald Coase (1998). "The New Institutional Economics," American Economic Review, 88(2), pp. 72-74.
  14. ^ R. H. Coase (1991). "The Institutional Structure of Production," Nobel Prize Lecture PDF, reprinted in 1992, American Economic Review, 82(4), pp. 713-719.
  15. ^ Douglass C. North (1990). Institutions, Institutional Change and Economic Performance, Cambridge University Press.
  16. ^ 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.
  17. ^ 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.
  18. ^ Oliver E. Williamson (2000). "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, 38(3), pp. 595-613 Archived May 11, 2011, at the Wayback Machine (press +).Dzionek-Kozłowska, Joanna; Matera, Rafał (October 2015). "New Institutional Economics' Perspective on Wealth and Poverty of Nations. Concise Review and General Remarks on Acemoglu and Robinson's Concept". Annals of the Alexandru Ioan Cuza University - Economics. 62 (1): 11–18. doi:10.1515/aicue-2015-0032.
  19. ^ Keefer, Philip; Knack, Stephen (2005). "Social capital, social norms and the New Institutional Economics". Handbook of New Institutional Economics. pp. 700–725.
  20. ^ "Introductory Reading List: New Institutional Economics". Ronald Coase Institute.
  21. ^ "History". Society for Institutional & Organizational Economics. Retrieved 3 February 2016.
  22. ^ Thelen, Kathleen (2004). How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan. Cambridge University Press. pp. 24–25. ISBN 978-0-521-54674-4.
  23. ^ Keohane, Robert O. (2020). "Understanding Multilateral Institutions in Easy and Hard Times". Annual Review of Political Science. 23 (1): 1–18. doi:10.1146/annurev-polisci-050918-042625. ISSN 1094-2939.
  24. ^ a b Simon, Herbert A (1991-05-01). "Organizations and Markets". Journal of Economic Perspectives. 5 (2): 25–44. doi:10.1257/jep.5.2.25. ISSN 0895-3309.
  25. ^ Moe, Terry M. (2005). "Power and Political Institutions". Perspectives on Politics. 3 (2). doi:10.1017/s1537592705050176. ISSN 1537-5927. S2CID 39072417.
  26. ^ Moe, T. M. (1990). "Political Institutions: The Neglected Side of the Story". Journal of Law, Economics, and Organization. 6: 213–253. doi:10.1093/jleo/6.special_issue.213. ISSN 8756-6222.
  27. ^ Knight, Jack (1992). Institutions and Social Conflict. Cambridge University Press. ISBN 978-0-521-42189-8.
  28. ^ North, Douglass C. "Transaction Costs, institutions, and Economic Performance." International Center for Economic Growth (n.d.): n. pag. Web.
  29. ^ Williamson, Oliver (2000). "The 'New Institutional Economics: Taking Stock, Looking Ahead". Journal of Economic Literature. 38 (3): 595–613. CiteSeerX doi:10.1257/jel.38.3.595.

Further reading