New Institutional Economics - Overview

Overview

NIE has its roots in two articles by Ronald Coase, "The Nature of the Firm" (1937) and "The Problem of Social Cost" (1960). In the latter, the Coase Theorem (subsequently so termed) maintains that without transaction costs alternative property right assignments can equivalently internalize conflicts and externalities. Therefore, comparative institutional analysis arising from such assignments 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 in considering both efficiency and distribution issues, in contrast to "traditional," "old" or "original" institutional economics, which is critical of mainstream neoclassical economics.

The term 'new institutional economics' was coined by Oliver Williamson in 1975.

Among the many aspects in current NIE analyses are these: organizational arrangements, property rights, 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 the subject include Harold Demsetz, Steven N. S. Cheung, Avner Greif, Claude Menard and four Nobel laureates — Ronald Coase, Douglass North, Elinor Ostrom and Oliver Williamson. A convergence of such researchers resulted in founding the International Society for New Institutional Economics in 1997.