Abstract
Since the emergence of New Institutional Economics movement, the study of institutions have regained prominence in the field of economic studies. There are three main tenets of institutional economics. First, institutions matter when it comes determining outcomes by guiding interaction among the members of the society. Second, there is a definite link between the welfare of a society and the institutional arrangements that are prevalent there. Basically, institutions act as instruments of welfare. Third, it has been observed that not all institutional arrangements work. Some institutions have performed better than others. The question that this paper tries to address are what is the exact procedure through which institutions improve welfare and why certain institutions work and others do not. With the help of a hypothetical example of an uncertain situation the process of institutions is described. A formal model of the process is then developed which is used to derive efficiency conditions for any institution.
Published Version
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