Quick guide to New Institutional Economics

doi:10.1016/j.jce.2013.01.002

Journal of Comparative Economics

Volume 41, Issue 1, February 2013, Pages 1-5

https://doi.org/10.1016/j.jce.2013.01.002 Get rights and content

Abstract

The old field of Comparative Economic Systems lacked a theoretical framework, which New Institutional Economics now provides. The paper is a brief guide to NIE: its strength, weaknesses, policy implications, and future tasks. The intellectual interest in the NIE approach is directly related to the gap between prevailing economic property rights (institution) and best practice (most productive) arrangements. A large productivity gap on a national scale is mainly found in two circumstances: in low income countries that fail to import and adapt existing technologies, and in high income countries failing to cope with new technologies, such as digitization.

Section snippets

The brand name

The name New Institutional Economics (NIE) may confuse the reader.¹ In the NIE context, the word “institution” does not refer to organizations (government agencies, industrial associations, corporations, hospitals), and, as Ronald Coase has emphasized, NIE is not a modern version of the old Institutional

The most useful concept

The most useful theoretical contribution of NIE is the idea that transactions are costly. In our world of incomplete information, measurement and enforcement in voluntary and involuntary transactions is costly; we have unavoidable transaction costs.

The weakest link

NIE studies not only rules (institutions) that formal organizations (parliaments, courts, business and professional associations, golf clubs) create and enforce but also informal institutions. Informal institutions correspond approximately to self-enforced social norms. Self enforcement is spontaneous and decentralized, involving alternatively self control, second party enforcement, or third party enforcement. Third party enforcement occurs when someone who is not directly involved punishes

The most ignored concept

Although most NIE scholars recognize social norms as important elements in institutional change, they are often reluctant to assign comparable roles to social theories (or social models).

The status quo concept

Autocratic governments maintain power by relying on small but powerful core groups of supporters. The autocrats reward the elites by providing them with economic resources and control over key industries. The first priority of all political leaders is to stay in power and for autocratic leaders that involves satisfying the material and other personal needs of their elite supporters. Democratic leaders require support from a majority of the voters. They cannot reward their voters personally but

Conclusion: the new frontier

The intellectual interest in the NIE approach is a positive function of the gap between prevailing economic property rights (institutions) and best practice (most productive) arrangements. A large productivity gap on a national scale is found in two circumstances: (a) in low-income countries that are far below the world’s production possibilities frontier and require new institutions to successfully import already known technologies; and (b) in frontier countries that have recently discovered

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Citation Excerpt :
Williamson (1975) introduced the new academic term “New Institutional Economics”. Along with North and Coase (Coase, 1984; North, 1986), Williamson is one of the most prominent representatives of this economic approach, although other authors have also contributed to the development of NIE through their research, such as Ostrom (Ostrom, 1990, 2002, 2007, 2009), Weingast (Weingast, 1993, 1995, 2008), Eggertsson (Eggertsson, 1990, 1997, 2013), Ménard and Shirley (Ménard and Shirley, 2005, 2014) and Rutherford (Rutherford, 1989, 1995). The institutions represent the central concept of the NIE approach.
In Spain, the institutional framework for photovoltaic energy production has experienced distinct stages. From 2007 to 2012, the feed-in-tariff system led to high annual growth rates of this renewable energy, but after the suppression of the policy of public subsidies, the sector stagnated. In recent years, green hydrogen, an innocuous gas in the atmosphere, has become a driving force that stimulates photovoltaic energy production. Since 2020, encouraged by the European energy strategies and corresponding funds, Spain has established a regulation to promote green hydrogen as a form of energy resource. Adopting the new institutional economics (NIE) approach, this article investigates the process of changing incentives for the energy business sector and its impact on photovoltaic energy production. The results show an increase in the number of both projects, approved or on approval, and companies involved in green hydrogen, that are planning to use photovoltaic energy in Spain, thus engendering the creation of a new photovoltaic business environment based on innovation and sustainability.
A Framework for Understanding the Institutional Arrangements of Urban Village Redevelopment Projects in China
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To increase the efficiency of the institutional arrangement, policymakers need to consider the transaction costs involved (Shahab et al., 2018). Most neo-institutional economists define institutions as the rules of a game in which individuals and their organisations are the players (Eggertsson, 2013). The function of institutions designed by human beings is to reduce the uncertainty (Ménard & Shirley, 2005; North, 1990) that can lead to the emergence of transaction costs.
Large-scale urban village redevelopment projects (UVRPs) have been implemented in different ways in China in recent years. This study develops an analytical framework for understanding the heterogeneity of institutional arrangements for UVRPs in China. The analytical framework is established from the perspective of neo-institutional economics. Decision-making and funding sources are used as two dimensions to classify the institutional arrangements into four categories: top-down with government funding (TGF), top-down with villager funding (TVF), bottom-up with villager funding (BVF) and bottom-up with private developer funding (BPDF). The comparative analysis reveals that the bottom-up institutional arrangement is generally more effective in political persuasion than the top-down one, especially when villagers’ committees (VCs) that are responsible for the project implementation are elected freely and fairly. When incorporating the dimension of funding sources into the analysis, a TVF institutional arrangement is likely to incur higher transaction costs than a TGF institutional arrangement, leading to the project having a longer duration. However, when private developers are allowed to participate and to develop UVRPs, the transaction costs will increase due to opportunism and information asymmetry. Policymakers should play an active role in arbitration as it would effectively mitigate the size of transaction costs used to deal with clashes between VCs, ordinary villagers and private developers. Based on information for 394 UVRPs collected from five coastal cities in Zhejiang province, the research findings reveal that a TVF institutional arrangement, which has the highest transaction costs, is still dominant in China. This may be the result of policy continuity and path dependence. Institutional change is contingent on the relative costs, which are the sum of the transformation costs and the transaction costs. Incremental institutional change, rather than radical institutional change, is more likely to occur in China.
Spatially varying relationships between land ownership and land development at the urban fringe: A case study of Shenzhen, China
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Citation Excerpt :
The development of “New Institutional Economics” (NIE) theories advanced traditional urban economic theories by highlighting that institutional factors are also influential in affecting the transaction cost of economic activities, which cannot be neglected. For some economic activities, the institutional cost may exceed the market cost (Bardhan, 1989; Coase, 1998; Eggertsson, 2013; North, 1987; Williamson, 2000). In China's land market, both market and institutional forces are at play and institutional factors are often more influential than market forces.
The conversion of rural land to urban land, known as land urbanization or urban expansion, often follows two tracks in China: 1) the government becomes the owner of the land through land expropriation and performs primary land development and land transfer; 2) villagers maintain their ownership of the land collectively and convert their non-construction land into construction land by themselves. The dual land ownership system is a unique factor which influences urban expansion in China. However, this influence may be inconsistently distributed over space. Local variations in land use regulations, government controls, and stakeholder participation could all lead to varied relationships between land ownership and land development. This research aims to answer two main questions, 1) whether or not the influence of the dual land ownership system on land development is consistent over space (spatial stationarity), and 2) how such relationships vary over space. Capitalizing on the land parcel data collected in Longhua district in Shenzhen in the years 1996 and 2010, this research utilizes a geographically weighted logistic regression (GWLR) modelling approach to test and visualize spatial non-stationarity in the relationship between land ownership and land development. The study focuses on Shenzhen, China, because it has experienced extremely rapid urbanization and because of the notable dual land system there. The results demonstrate that land ownership (collectively-owned vs. government-owned) has statistically significant relationships to land development and that such relationships vary over space. There are areas where land ownership profoundly influences land development, whereas in other areas the influences are limited. GWLR proved to be a useful exploratory spatial analysis tool which may lead to new insights on the interconnections between dual land ownership and urbanization.
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Apart from that, qualitative policy analyses are important complements to classical quantitative approaches [61]. The first dimension identified, institutional settings and regulatory paradigm, refers to the regulative perspectives of institutional theory in which formal organizations create and enforce rules of the game (laws, regulations and outlines) [77] for the existing socio-technical systems, i.e. the electricity system. Formal rules and established practices influence actors’ (regulators, policy-makers, producers, consumers etc.) behavior, while downplaying the role of informal institutions (e.g., social & cultural norms and collective expectations) [78].
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Guo and Lee (2011), in their study of publishing patterns, find that publications classified under the JEL Code for Economic Systems (P) have declined noticeably from 2.58% in 1991–0.25% in 2007.4 Many blamed the lack of theory and absence of a consistent methodology in CES studies for precipitating the decline in the field (Eggertsson, 2013; Pryor, 2005). Dallago (2004, 84) opined that “CES does not have a distinct method, but is more an eclectic field of research in which researchers belonging to different schools of economic thought and following different theories work on problems of more or less common interest”.
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Quick guide to New Institutional Economics

Abstract

Section snippets

The brand name

The most useful concept

The weakest link

The most ignored concept

The status quo concept

Conclusion: the new frontier

The Role of Institutions in Growth and Development

The Economic Analysis of Property Rights

The Logic of Political Survival

The nature of the firm

Economica

The New Institutional Economics

Journal of Theoretical and Institutional Economics

Economic Behavior and Organization

Imperfect Institutions: Possibilities and Limits of Reform

The weight of history on cultural European integration. A gravity approach

American Economic Review

Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds

Private Truths, Public Lies: The Social Consequences of Preference Falsification