New Institutional Economics

Also known as: NIE

framework · economics · structured-empirical

North and others extending economic analysis to institutions, property rights, and history.

New Institutional Economics (NIE) is a research program that extends the analytical methods of economics to the study of institutions — the formal and informal rules that structure economic and social interaction — explicitly relaxing the neoclassical assumption that institutions are unimportant or fixed. Douglass North's work on the role of institutions and institutional change in long-run economic performance, Oliver Williamson's transaction cost economics, Elinor Ostrom's analysis of common-pool resource governance, and Mancur Olson's work on collective action together established the program; North, Williamson, and Ostrom each received Nobel Prizes for the program's contributions. NIE has been particularly influential in development economics, where it provides the analytical foundation for arguments that institutional quality (property rights, rule of law, contract enforcement) is the deep determinant of cross-country income differences.

Originators

Douglass North; Oliver Williamson; Elinor Ostrom; Mancur Olson; Ronald Coase as foundational figure high

Year / Decade

1970s onward (formalization); 1937 Coase as precursor; 1991 (North Nobel), 2009 (Williamson and Ostrom Nobel) high

Primary sources

North, D.C. (1990). Institutions, Institutional Change and Economic Performance, Williamson, O.E. (1985). The Economic Institutions of Capitalism, Ostrom, E. (1990). Governing the Commons high

Core components

Institutions as rules of the game (vs organizations as players)
Property rights
Transaction costs
Formal vs informal institutions
Path dependence in institutional development
Common-pool resource governance (Ostrom design principles)
Collective action problems
Institutional change

Primary use case

Development economics and analysis of cross-country growth differences; comparative institutional analysis; common-pool resource governance; constitutional political economy; theory of the firm extensions.

Common criticisms

Definition of 'institution' varies considerably across NIE authors, creating cross-citation confusion
difficulty operationalizing institutional quality for measurement (Acemoglu-Robinson critiques notwithstanding)
explanation of institutional change is often underdetermined
risk of selection on the dependent variable (good institutions correlate with good outcomes by construction)
cultural and historical variables can be smuggled in as 'institutions'.

Lineage

Siblings: Transaction Cost Economics, Coase Theorem, Path Dependence