Professor of Economics
Institute of Behavioral Science University of Colorado
The New Institutional Economics:
Its Roots, Growth and Future
What is the NIE?
1) Interdisciplinary
2) Comparative
3) Set of concepts, e.g., property rights,
agenda control, credible commitment…
Government Informal Institutions
(Norms of Society)
Formal Institutions (Laws of Society)
Property Rights
Technology
Transaction Costs Transformation Costs
Costs of Internal Production
Costs of Exchange
Economic Performance
Figure 1
Institutions and Economic Performance
Economic Performance
Special Interests Citizens/Consumers Winners Losers
Executive Legislature Prime Minister
President
Competent and Honest Independent and Honest
Figure 2
The Determinants of Formal Institutions
Southern Paternalism and the American Welfare State
• Paternalism was an implicit contract:
Demand and Supply of Paternalism
• Demand by workers:
- resulted from the discrimination
• Supply by landlords:
- high labor monitoring costs with pre-mechanized agriculture.
• Level of analysis at this point:
Who Determined the Institutions?
• Political power: agricultural elite
• Political Power of Southerners:
Institutional Results
• Little change in welfare policy, labor
policy, civil rights or voting rights until the 1960s
• Why the 1960s? - mechanization of
cotton production
• Southerners abandoned paternalism;
NIE: What do we know?
Contracting: linkages among institutions, property rights, transaction costs and contracts
Political Economy: roles played by legislative institutions and special
interests in shaping the laws of society
Both have been absorbed into the mainstream of Neo-Classical
NIE: What Don’t We Know?
Staying Ahead of the Mainstream
• We know too little about the origins of
norms and how they shape outcomes
• We need a better understanding of
institutional path dependence in the presence of poor economic outcomes
Why institutional path dependence?
1. Informational problems abound
What can we learn from:
- cognitive psychology and experimental economics?
- empirical studies of insufficient
Why Institutional Path Dependence?
2. Disapproval of the outcome but approval of the process that
generated the outcome. Trapped? - role of political entrepreneurs
3. Serious collective action problems - role of political entrepreneurs
Why Do We Want Insecure Political Property Rights?
• Transparent side-payments would
undermine the legitimacy of government.
• Discourages politicians from making
Why Do We Want Secure Political Property Rights?
• It would enable more credible
commitment among politicians
• It would stabilize policy
Overcoming Institutional Path Dependence: Achieving Economic Development
• Political Entrepreneurship
- Cardoso in Brazil vs Chavez in VZ
- Someone who plays for the history books - Strong but checked executive powers?
• The Role of Crises
- Gives more latitude for political entrepreneurship
How do we make headway in the NIE?
• Continue what we are doing which requires
insights from anthropology, economics, history, law, psychology, political science and sociology
• Orchestrated case studies over time of
