New institutional economics

New Institutional Economics (NIE) is a subfield of economics that focuses on the role of institutions in shaping economic behavior and outcomes. It emerged in the 1970s and 1980s as a response to the limitations of traditional neoclassical economics, which assumed that individuals and firms act rationally and that markets are efficient.

NIE emphasizes the importance of institutions, such as laws, norms, and organizations, in shaping economic behavior and outcomes. It argues that institutions can influence economic outcomes by:

  1. Providing incentives: Institutions can create incentives that encourage or discourage certain behaviors.
  2. Reducing transaction costs: Institutions can reduce the costs of transactions by providing a framework for exchange and cooperation.
  3. Shaping preferences: Institutions can influence individuals' preferences and values, which in turn affect their economic behavior.
  4. Creating uncertainty: Institutions can create uncertainty, which can lead to risk aversion and other behavioral responses.

Some key concepts in NIE include:

  1. Property rights: The rights and responsibilities associated with owning and using resources.
  2. Transaction costs: The costs of exchanging goods and services, including the costs of negotiating, monitoring, and enforcing contracts.
  3. Information asymmetry: The unequal distribution of information between parties in a transaction.
  4. Principal-agent problems: The conflicts of interest that can arise when one party (the principal) delegates decision-making authority to another party (the agent).
  5. Path dependence: The idea that the course of economic development is influenced by historical events and institutions.

NIE has been applied to a wide range of topics, including:

  1. Economic development: NIE has been used to study the role of institutions in economic development, including the impact of institutions on economic growth, poverty, and inequality.
  2. International trade: NIE has been used to study the impact of institutions on international trade, including the role of institutions in shaping trade agreements and trade policies.
  3. Corporate governance: NIE has been used to study the role of institutions in shaping corporate governance, including the impact of institutions on firm performance and corporate social responsibility.
  4. Environmental economics: NIE has been used to study the role of institutions in shaping environmental outcomes, including the impact of institutions on environmental policy and environmental behavior.

Some notable economists who have contributed to the development of NIE include:

  1. Douglass North: A Nobel laureate who is considered one of the founders of NIE.
  2. Oliver Williamson: A Nobel laureate who is known for his work on transaction costs and the economics of organizations.
  3. Ronald Coase: A Nobel laureate who is known for his work on the theory of the firm and the economics of institutions.
  4. Elinor Ostrom: A Nobel laureate who is known for her work on the economics of common-pool resources and the role of institutions in shaping environmental outcomes.

Overall, NIE provides a framework for understanding the role of institutions in shaping economic behavior and outcomes, and has been applied to a wide range of topics in economics and related fields.