August 31st, 2009



» 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.


» 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.


» 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.


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


» 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.


» 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.


» Governance structure

1. A system of rules plus the instruments that serve to enforce the rules.

2. The explicit or implicit contractual framework (including markets, firms, and mixed modes) within which a transaction is located.


» 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.


» 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.


» 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.


» 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.


» 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.  An attribute of an individual in a social context. Social capital is determined by a) the individual’s connections – whom he/she knows, and common group memberships, b) the strength of these ties, and c) the resources available to these various groups. It can be acquired partly through purposeful actions and can be transformed into conventional economic gains.


» 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.


» 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.


» Rent-seeking

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


» 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.


» 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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