Chapter 1 - The New Institutional Economics and Economic Development: An Introduction

Abstract

This chapter focuses on two principal components: transaction costs and the theory of collective action. The chapter describes the domain and scope of each component and explores the interrelationships between them. The institutions and their determinants that are the subject matter of the New Institutional Economics (NIE) have long served as a battleground among the alternative leading paradigms, namely, Marxian, neoclassical, and sociobiological. NIE represents the culminating intersection of a number of different lines of investigation, including the analysis of behavioral norms, the integration of persons with different tastes and preferences into voting coalitions, interest group formation, the problems of and prerequisites for collective action, transaction costs, organization theory, limitations on the rationality of human behavior, the emergence of rules of thumb for firm decision-making, the determinants of firm structure, coordination problems, rent-seeking behavior, technological change and its relationship to institutional change, and the determinants and effects of property rights. NIE explanations of existing institutional arrangements and their functions may yield rather different policy implications than those derived from traditional approaches; therefore, the application of the NIE to development policy could lead to significant new policy initiatives in less-developed countries.