Christopher Clague

THE NEW INSTITUTIONAL ECONOMICS AND ECONOMIC DEVELOPMENT

1 From Physical Capital to Human Capital to Social Capital
In the early postwar period, economists turned their attention to economic development
-

They thought that the main difference between rich and poor countries was in the amount of
physical capital per person they possessed
Physical, human capital and technological progress are essential to economic growth and
development, interpretations of the problem of economic development

NEW INSTITUTIONAL ECONOMICS

Institutions are defined as socially devised constraints on individual action followed by members or
particular rules about governing exchanges in a society.
-

People following the rules let the community be better off than those lacking them. This makes
institutions liberators of collective rights

The rules can be formally written down and enforced by government officials or unwritten and
informally sanctioned [The rules] do not require uniformly obeyed to be considered institutions, but
the concept does require some degree of obedience.
Different categories of institutions:
-

The constitutional order fundamental set of rules, written and unwritten.

The institutional arrangements - these are devised by the collective and individual actions of the
members.
The cultural endowments normative behavioral codes of society and the mental models that
people use to interpret their experience.

3.1. Markets and hierarchies, or transaction-cost economics

- Studies employment relationship; nature of constraints in the business world, among other topics of
Economics of imperfect information.
Why did certain transactions take place within organizations rather than between separate firms in a
market?
Central to industrial organization and it has important implications for the understanding of vertical
integration, mergers and antitrust policy.
Emphasis on the complexity of economic life, pervasive uncertainty, bounds on rationality and
opportunism and the human capacity and willingness to develop relationships of trust.
3.2. Economics of imperfect information (technical literature)
-

Began with two problems in the insurance industry: adverse selection and moral hazard

It includes economics of screening and statistical discrimination, principal agent models, theories of
mechanism design, theory of organizations, bargaining theory, and theories of incentive-compatible
contracts
This literature does not introduce moral considerations
People are usually utility maximizers

3.3. The economics of property rights (wealth contracts, lack of enforcement, and fear of the landlord)
-

Structure of property rights is crucial to economic efficiency and economic progress

This lit clarified the dimensions of individual rights to use, rent, sell, destroy, modify, donate and
transform property and the ways in which the rights of some parties to treat their property affect
the rights of others
A variety of property rights structures can be enforced
Inefficient is a situation in which such contracts are either prohibited by law or for other reasons are
not enforceable in practice and landlords discharge tenants or refuse to take them on for fear of
losing their property rights to the land
Division of property rights does not have efficiency implications is considered asymmetric
information
Initial allocation of wealth has implications for the efficiency of resource allocation
o A potential creditor may be willing to lend to a potential entrepreneur only if the latter has
enough wealth to make credible his commitment to the project
The delimitation and enforcement of property rights is a costly process
Societies do not generally define and enforce property rights to resources that are not scarce
o As particular resources become scarce, societies tend to establish property rights in these
resources
Economists do not usually claim to have comprehensive theories of these phenomena

3.4. Collective action (of entrepreneurs)

-

The concept of a public good and the associated free-rider problem, could fruitfully be applied to a
great variety of group goals
The theory of collective action is concerned with the conditions under which groups of people with
a common interest will perceive that interest and act to achieve it, when they share common values
and beliefs
Groups are more likely to form when there are a few members with a significant stake in the
outcome

3.5. The evolution of cooperation and norms

-

Cooperation can emerge spontaneously between two parties even when both are potentially in
conflict
Game theory has explored the conditions under which cooperation may emerge
o The likelihood of cooperation depends on the nature of the game and on the probability of
continued play with the same partner
Researches have found it useful to modify the assumptions of classical game theory to place less
emphasison the ability to find workable heuristics or norms that structuretheir cooperative efforts
This social effort relied on shared symbols, or cultural focal points
These symbols structure the way people think about their options

3.6 The effects on efficiency of institutional innovation

This study includes their evaluation from a normative point of view