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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 that underlie economic activity.



NIE has its roots in Ronald Coase's fundamental insights in The Problem of Social Cost and The Nature of the Firm. The Coase Theorem, along with the contributions of Steven N.S. Cheung, established that without transaction costs alternative institutions can equivalently internalize conflicts and externalities. Therefore, comparative institutional analysis (Demsetz, 1967, 1969; Aoki, 2001) 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 and depart from "old" or "critical" institutional economics, authors often care about both efficiency and distribution issues. The main distinction is that NIE works within a neoclassical framework, while critical institutional economics reject neoclassical economics.

The term 'New Institutional Economics' was coined by Oliver Williamson in 1975.

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, Harold Demsetz, Avner Greif, and Claude Menard. 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 department.

Further reading

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