Institutions and Economic Theory: The Contribution of the New Institutional Economics (Economics, Cognition, and Society)

A much-needed exploration of the New Institutional Economics, or NIE, including a critical assessment of its central theoretical contributions since the field's early beginnings in the 1960s, is this book's objective. It traces the development of major ideas about the genesis and significance of institutions as these ideas have been presented in the NIE. Given the fundamental understanding underlying work in this new area of research--that transactions involve the use of real resources and have costs--the book views the NIE as an amalgam of transaction-cost economics, property-rights analysis, and contract theory.

Efforts are made to explain how the various theoretical strands discussed in the NIE literature fit into the general fabric of modern institutionalism, and how the new concepts put forward can be applied to institutional analysis. Since the new institutionalist approach contrasts sharply with that of the traditional neoclassical model, special attention is given to elucidating the points of difference between the two. And, along these lines, a final chapter deals with the troubling question of whether neoinstitutionalist theory can be advanced by efforts to extend or generalize neoclassical theory.

The second edition assesses some of the major refinements, extensions, and useful applications that have developed in neoinstitutionalist thought in recent years. More attention is given to the overlap between the New Institutional Economics and developments in economic history and political science. In addition to updated references, new material includes analysis of parallel developments in the field of economic sociology and its attacks on representatives of the NIE as well as an explanation of the institution-as-an-equilibrium-of-game approach.

The book will be essential reading for economists attracted to the NIE approach. In addition, scholars from such disciplines as political science, sociology, and law will find the work useful as the NIE continues to gain wide academic acceptance.

Acknowledgments	xi
Preface	xiii
Chapter 1. Introductory Observations	1
1.1. Some Basic Assumptions and Terms	2
1.2. The Strange World of Costless Transitions	8
1.3. The Ideal Type of the Classical Liberal State	11
1.4. The Ideal Type of Market Socialism	12
1.5. Constructed or Spontaneous Orders	14
1.6. The Work of the Invisible Hand Can Be Accelerated	15
1.7. Rational Incompleteness	17
1.8. Enforcement	19
1.9. The Political Process	21
1.10. Agency	22
1.11. Institutional Stability	23
1.12. Once More with Feeling	25
1.13. The New Institutional Economics and Modern Institutionalism	29
1.14. Some Notes on the History of the Old Institutional Economics	33
1.15. Suggested Readings for Chapter 1	37
Chapter 2. Transaction Costs	39
2.1. The Concept of Transaction	41
2.2. Transaction Costs: Illustrations and Attempts at Definition	42
2.3. Guesstimating the Size of Transaction Costs	49
2.4. Modeling Transaction Costs: The Activity “Transaction”	54
2.5. Some Notes on the Development of the Transaction Cost Literature	62
2.6. Suggested Readings fur Chapter 2	67
Chapter 3. Absolute Property Rights: Ownership of Physical Objects	69
3.1. Property Rights Approach: Some Basic Concepts	71
3.2. Property Rights: Illustrations and Attempts at Definition	76
3.3. Property in Physical Objects: The Private Property Issue	85
3.4. Common Pool Resources	98
3.5. The Emergence of Property Rights	104
3.6. The Economic Analysis of Property Rights: Some Notes on the Literature	114
3.7. Suggested Readings for Chapter 3	119
Chapter 4. Relative Property Rights: Contractual Obligations	121
4.1. Basic Principles of Contractual Obligations	123
4.2. Diverse Types of Contractual Obligations	127
4.3. Some Elements of Contract Theory from the Economist’s Viewpoint	140
4.4. Three Types of Contract Theory	147
4.5. Resume	169
4.6. The Economics of Contract Law and Contractual Behavior: Some Notes on the Literature	172
4.7. Suggested Readings for Chapter 4	176
Chapter 5. Contract Theory	179
5.1. Overview of the Types of Contract Theory to be Discussed	181
5.2. Managerial Theory of the Finn: The Expense-Preference Model	183
5.3. The Principal-Agent Model: Moral Hazard	186
5.4. The Principal-Agent Model: Adverse Selection	202
5.5. Implicit Contracts	227
5.6. The Incomplete Contract Model	232
5.7. Self-Enforcing Agreements	239
5.8. Looking Back	246
5.9. Bibliographic Notes on Formal Contract Theory	250
5.10. Suggested Readings for Chapter 5	262
Chapter 6. The New Institutional Economics Applied to Markets, Firms, and the State: General Remarks	265
6.1. The Elementary Rules of a Private Ownership Economy	266
6.2. General Remarks on Organizations: The Firm, the Market and the State	269
6.3. A Brief Guide to the Literature on Order and Organization	278
6.4. Suggested Readings for Chapter 6	281
Chapter 7. The New Institutional Economics of the Market	283
7.1. The Market as Organization	284
7.2. On Price Rigidity	285
7.3. Market Organization as a Result of Market Cooperation	287
7.4. Some Views of Neoinstitutionalists on Market Organization	291
7.5. A Brief Guide to the Literature on Market Organization	314
7.6. Suggested Readings for Chapter 7	319
Chapter 8. The New Institutional Economics of the Firm	321
8.1. The Orthodox Neoclassical Firm	321
8.2. The Incentive to Integrate	328
8.3. The Limits of Integration	336
8.4. Ownership and Control	342
8.5. Institutional Models in the Tradition of the Neoclassical Theory of the Firm	354
8.6. The Traditional Soviet Firm	366
8.7. The Socialist Labor-Managed Firm	375
8.8. Codetermination	389
8.9. The New Institutional Economics of the Firm: Forerunners and First Steps	404
8.10. The New Institutional Economics of the Firm: Summary and Main Literature Beyond Coase	405
8.11. Suggested Readings for Chapter 8	410
Chapter 9. The New Institutional Economics of the State	413
9.1. A Simple Neoclassical Theory of the State	414
9.2. The Role of Political Institutions	417
9.3. Political Markets	420
9.4. International Relations	423
9.5. A Brief Guide to the Literature on the Economics of the State and International Relations	430
9.6. Suggested Readings for Chapter 9	434
Chapter 10. Future Development of the New Institutional Economics	435
10.1. Institutionalism as Extended Neoclassical Theory	439
10.2. The Initial Approach Reconsidered	441
10.3. The Basis of a New Paradigm	464
10.4. Modern Institutionalism: The Opportunities for Progress	477
Glossary	483
References	497
Author Index	539
Subject Index	547