Chapter 2 - Institutions and the Economics of Behavior I

Abstract

This chapter focuses on the micro-foundations of the link between institutions and economic outcomes. The new institutional economics seeks to account for the emergence and persistence of institutions on the basis of their efficiency. One of the key concepts of the new institutional economics is transaction costs. Institutions emerge and persist when the benefits they confer are greater than the transaction costs involved in creating and sustaining them. Without the concept of transaction costs, it might be impossible to understand how an economic system works. Poorly constructed institutions are identified as a source of higher transaction costs. The assignment of property rights matters, because of positive transaction costs. Transaction costs are more generally considered to be the resources spent on delineating, protecting, and capturing property rights.