Brief Glossary for New Institutional Economics

Compiled by Alexandra Benham

Collective action|Commons|Contract|Corruption|Governance structure|

|Informal economy| Institution|New Institutional Economics|Opportunity cost| |Organization|Path dependence|Property rights|Rent-seeking|Social capital|

|Social cost|Transaction|Transaction costs|

Institution

The rules of the game: the humanly devised constraints that structure human interaction.They are made up of formal constraints (such as rules, laws, constitutions), informal constraints (such as norms of behavior, conventions, self-imposed codes of conduct), and their enforcement characteristics.

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New Institutional Economics

Incorporates a theory of institutions into economics. It builds on, modifies, and extends neoclassical theory. It retains and builds on the fundamental assumption of scarcity and hence competition - the basis of the choice theoretic approach that underlies microeconomics.

It has developed as a movement within the social sciences, especially economics and political science, that unites theoretical and empirical research examining the role of institutions in furthering or preventing economic growth. It includes work in transaction costs, political economy, property rights, hierarchy and organization, and public choice.Most scholars view the work of Ronald Coase as a central inspiration for the field.

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Organization

A group of individuals bound by some common purpose to achieve objectives. Organizations include political bodies (political parties, regulatory agencies), economic bodies (firms, trade unions), social bodies (churches, clubs), and educational bodies (schools, universities).

Note that the term "institution" refers to the rules of the game, whereas "organization" refers to players of the game.

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Transaction

A transaction occurs when a good or service is transferred across a technologically separable interface.

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Transaction costs

The costs of resources utilized for the creation, maintenance, use, and change of institutions and organizations. They include the costs of defining and measuring resources or claims, the costs of utilizing and enforcing the rights specified, and the costs of information, negotiation, and enforcement.

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Property rights

There are two distinct meanings:economic property rights and legal property rights. The economic property rights of an individual over a commodity or an asset are the individual's ability, in expected terms, to consume the good or the services of the asset directly or to consume it indirectly through exchange. These can include (1) the right to use an asset, (2) the right to earn income from an asset and contract over the terms with other individuals, and (3) the right to transfer ownership rights permanently to another party.

The legal property rights are the property rights that are recognized and enforced by the government.

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Governance structure

An institutional framework in which the integrity of a transaction, or related set of transactions, is decided. Governance is the means by which order is accomplished in a relation in which potential conflict threatens to undo or upset opportunities to realize mutual gains.

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Contract

A legally enforceable agreement.It is a formal, legal commitment to which each party gives express (though not necessarily written) approval and to which a particular body of law applies.

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Social cost

An actor (business firm, individual, etc.) initiating an action does not necessarily bear all the costs or reap all the benefits of that action. Those that the actor does bear are the private costs; those that the actor does not bear are the external costs. The sum of these two is the social cost.

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Collective action

Actions taken by two or more people, comprising a group or organization, in pursuit of the same collective good—a good such that, if any member of the group consumes it, it cannot feasibly be withheld from the others in the group.

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Commons

A scarce resource used in common, from which it is not feasible to exclude potential beneficiaries from using or consuming it, and for which each actor's use or consumption of it subtracts from its availability to others.

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Social capital

1. Features of social organizations, such as trust, norms, and networks, that can improve the efficiency of society by facilitating coordinated actions.

2. Features inherent to the structure of relations between and among actors. Each variety of social capital consists of some aspect of social structure, and each facilitates certain actions of actors—persons or corporate actors—within the structure.

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Informal economy

Economic actions and activities conducted outside the legal framework of society.The activities or products may in themselves may be legal, but they are conducted in a way which disobeys specific legal provisions, such as registration with the government, payment of taxes, and so on.

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Corruption

Behavior which deviates from the formal duties of a public role because of private-regarding (close family, personal, private clique) pecuniary or status gains; or violates rules against the exercise of certain types of private-regarding influence.

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Rent-seeking

The outlay of resources by individuals and organizations in the pursuit of rents created by government.

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Opportunity Cost

The evaluation placed on the most highly valued of the rejected alternatives or opportunities when a choice is made. It is the value that is given up in order to secure the higher value that selection of the chosen object embodies.

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Path dependence

A condition that exists when the outcome of a sequence of economic changes can be significantly influenced by temporally remote events, including happenings dominated by chance elements rather than systematic forces.

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Sources (terms listed alphabetically)

Collective action

Mancur Olson (1965), The Logic of Collective Action: Public Goods and the Theory of Groups, Cambridge, MA: Harvard University Press, p. 1, p. 14.

Commons

Elinor Ostrom (1990), Governing the Commons, Cambridge: Cambridge University Press, p. 2, p. 6.

Contract

Scott E. Masten (2000), Contractual Choice, in Encyclopedia of Law and Economics, Volume III. The Regulation of Contracts, Boudewijn Bouckaert and Gerrit De Geest, eds., Cheltenham: Edward Elgar, p. 25.

Corruption

Joseph S. Nye (1967), Corruption and Political Development: A Cost-Benefit Analysis, American Political Science Review, 61 (2): 417-427.

Governance structure

Oliver E. Williamson (1996), The Mechanisms of Governance, Oxford: Oxford University Press, pp. 11-12.

Informal economy

Hernando de Soto (1989), The Other Path, New York, Harper & Row, p. 12.

Institution

Douglass C. North (1994), Economic Performance Through Time, Nobel prize lecture, December 19, 1993. Also published in The American Economic Review, 84 (3): 359-368,

p. 360.

New Institutional Economics

Douglass C. North (1992), The New Institutional Economics and Development, Washington University in St. Louis, p.1.

John Nye (2004), personal communication.

Opportunity cost

James M. Buchanan (1987), Opportunity Cost, in The New Palgrave: A Dictionary of Economics, John Eatwell, Murray Milgate, and Peter Newman, eds, London: Macmillan Press, volume 3, pp. 718-721.

Organization

Douglass North (1990), Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press, p. 5.

Path dependence

Paul A. David (1985), Clio and the Economics of QWERTY, American Economic Review 75 (2): 332-337, p. 332.

Property rights

Yoram Barzel (1997), Economic Analysis of Property Rights, Cambridge: Cambridge University Press, second edition, pp. 1-2.

Thrainn Eggertsson (1990), Economic Behavior and Institutions, Cambridge: Cambridge University Press.

Rent-seeking

Anne O. Krueger (1974), The Political Economy of the Rent-Seeking Society, The American Economic Review, 64 (3): 291-303, p. 291.

Gordon Tullock (1998), The Fundamentals of Rent-Seeking, The Locke Luminary Vol. I, No. 2 (Winter 1998) Part 2.

Social Capital

Robert D. Putnam (1993), Making Democracy Work, Princeton: Princeton University Press,

p. 167.

James S. Coleman (1988), Social Capital in the Creation of Human Capital , The American Journal of Sociology, Vol. 94, Supplement, pp. S95-S120, p. S98.

Social cost

Ronald Coase (1960), The Problem of Social Cost, Journal of Law and Economics 3:1-44.

Transaction

Oliver E. Williamson (1996), The Mechanisms of Governance, Oxford: Oxford University Press, p. 379.

Transaction costs

Eirik G. Furubotn and Rudolf Richter (1997), Institutions and Economic Theory: The Contribution of the New Institutional Economics, Ann Arbor: The University of Michigan Press, p. 40.

|Collective action|Commons|Contract|Corruption|Governance structure|

|Informal economy| Institution|New Institutional Economics|Opportunity cost| |Organization|Path dependence|Property rights|Rent-seeking|Social capital|

|Social cost|Transaction|Transaction costs|