said, and he was right, that the productivity of an economic system
depends on specialization. But specialization is only possible if
there is exchange. And the lower the costs of exchange (transaction
costs as they have come to be called) the more specialization there
will be, the greater the productivity of the economy and the higher
the standard of living of people in that economy.
However, the level of transaction costs depends on the institutions
in a country, its legal system, its political system, its culture
and so on. This is why we must include the influence of these
institutions in our study of the working of an economic system.”
(Newsletter of The International Society for New Institutional Economics,
impede the formation of efficient markets rob people of
opportunities to improve their standards of living.
These obstacles include weak enforcement of contracts and laws,
insecure property rights, corrupt or inefficient bureaucracies, and
societal norms that discourage cooperation. They result in high
transaction costs, which reduce exchange, employment, and growth.
High transaction costs are hard to overcome. Rules and norms often
allow those who have a stake in maintaining these costs to thwart
reforms. Even without active opponents to change, habits and
long-standing alliances may impede efforts to reduce high
Institutions such as laws, customs, and social norms profoundly
affect the level of transaction costs. Because these institutions
vary from one country to the next, policies that have worked in some
countries often produce disappointing outcomes when imported into
other settings. Economic models that ignore institutions fail to
take into account the many real barriers to market exchanges.
Institutions are not well understood. While local scholars have a
comparative advantage in understanding and affecting the
institutions in their own countries, they often lack the tools,
training, incentives, and funding to analyze institutions and their
effects on economic performance.
Thorough knowledge of institutions is crucial to designing good
To focus attention on major works in the field of institutional
analysis and broaden the understanding of those ideas.
To build young scholars' capacity to do institutional research and
communicate their findings in their own countries.
To develop a worldwide network of scholars doing excellent work in
institutional analysis, thereby expanding people's opportunitites to improve their own well-being.
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