The NIE is “New”

 To distinguish it from the ‘old” institutional

economists such as Thorsten Veblen, John R.
Commons, Wesley Mitchell and Clarence
Ayres

 The old institutional economics was

economics with institutions but without
theory; standard neoclassical economics; and
the NIE is attempting to provide economics
with both theory and institutions
 NIE
 The new institutional economics, or NIE, is a
branch of economics that especially
incorporates various institutional constraints
into formal economic analysis in order to
explain, on the basis of rational choice,
observable real-world phenomena that
standard neoclassical economics (absent
institutional constraints) is unable to explain,
except by assuming irrational behavior on the
part of individual economic agents
 The Neoclassical Behavior
Assumptions
 The economics world is view in equilibrium
 Economic actors face same choice situation
 The actor have stable preferences and
criteria
 Opportunity for improving outcomes
 Fail to maximized the preferences
 Perfect information
 Zero transaction cost
 Institutions
Formal:
 Laws and regulations
 Contracts
 Constitutional laws

Informal:
 Trust
 Ethics or values
 Political norms
 Organization

 Organizations are sets of actors who

collectively pursue common objectives
 Political organization
 Economic organization
 Social organization
 Educational organization
 Institutions Change
 Institutions are the rules that shape the
behavior of organizations and individuals in a
society

 Reforming institutions are rules that

determine the non price incentives for the
behavior of individual and organizations

 Rules may solve information and enforcement

problems
Institutional Change (North)
1. Scarcity and competition
2. Competition drives skill and
knowledge
3. Institutional framework dictates
skill and knowledge
4. Perceptions
5. Economic scopes and path
dependent
 LEVEL
Embedded ness:
Social theory (L1) informal institutions, customs,
Tradition, norms religion

Economics of
Property rights/ Institutional environment:
Positive political Formal rules of the game-esp. property
Theory (L2) (polity, judiciary, bureaucracy)

Transaction cost Governance:

Economics (L3) Play of the game-esp.
contract (aligning governance
Structures with transactions)

Neoclassical
Economics/ Resource allocation and employment
Agency theory (L4) (prices and quantities; incentive alignment)
 Level 1
 is undertaken by some economic historian and
other social scientists
 Level 2
 is referred to institutional environment (formal
rules): property right
 Level 3
 the governance of contractual relation
(transaction cost)
 Level 4
 neoclassical economics (agency theory)
The Concept of Property Right

 There are the rights to use an asset

 The right to earn income from an asset
and contract
 The right to transfer permanently to
another party ownership right over an
asset (sell an asset)
The Concept of Transaction Cost

 Consist of the cost of measuring the

attribute of what is being exchange and
the cost of protecting right, policing
and enforcing agreement
 Depend on human behavior assumptions
i.e. bounded rationality and
opportunism
 The Concept of Contract

 Manifestations of intention to act or

refrain from acting in a specified way
 The choice of contracts is determine by
transaction cost, economic risk and
legal arrangement
The Concept of Agency theory
 The relationship between two parties, a
principal and an agent who makes
decisions on the behalf of the principal
(market and hierarchies)
 Information and enforcement problems
trigger adverse selection and moral
hazard