|Part of a series on|
|Part of a series on|
New Institutional Economics (NIE) is an economic perspective that attempts to extend economics by focusing on the institutions (that is to say the social and legal norms and rules) that underlie economic activity and with analysis beyond earlier institutional economics and neoclassical economics.  Unlike neoclassical economics, it also considers the role of culture and classical political economy in economic development. 
The NIE assume that individuals are rational and that they seek to maximize their preferences, but that they also have cognitive limitations, lack complete information and have difficulties monitoring and enforcing agreements. As a result, institutions form in large part as an effective way to deal with transaction costs. 
NIE rejects that the state is a neutral actor (rather, it can hinder or facilitate effective institutions), that there are zero transaction costs, and that actors have fixed preferences. 
It has its roots in two articles by Ronald Coase, "The Nature of the Firm" (1937) and "The Problem of Social Cost" (1960). In the latter, the Coase theorem (as it was subsequently termed) maintains that without transaction costs, alternative property right assignments can equivalently internalize conflicts and externalities. Thus, comparative institutional analysis arising from such assignments is required to make recommendations about efficient internalization of externalities  and institutional design, including Law and Economics.
Analyses are now built on a more complex set of methodological principles and criteria. They work within a modified neoclassical framework in considering both efficiency and distribution issues, in contrast to "traditional", "old" or "original" institutional economics, which is critical of mainstream neoclassical economics. 
The term 'new institutional economics' was coined by Oliver Williamson in 1975.  
Among the many aspects in current analyses are organizational arrangements (such as the boundary of the firm), property rights,  transaction costs,  credible commitments, modes of governance, persuasive abilities, social norms, ideological values, decisive perceptions, gained control, enforcement mechanism, asset specificity, human assets, social capital, asymmetric information, strategic behavior, bounded rationality, opportunism, adverse selection, moral hazard, contractual safeguards, surrounding uncertainty, monitoring costs, incentives to collude, hierarchical structures, and bargaining strength.
Major scholars associated with the subject include Masahiko Aoki, Armen Alchian, Harold Demsetz,   Steven N. S. Cheung,   Avner Greif, Yoram Barzel, Claude Ménard (economist), Daron Acemoglu, and four Nobel laureates—Ronald Coase,   Douglass North,   Elinor Ostrom,  and Oliver Williamson.    A convergence of such researchers resulted in founding the Society for Institutional & Organizational Economics (formerly the International Society for New Institutional Economics) in 1997.  The NIE has influenced scholars outside of economics, including historical institutionalism, influential works on U.S. Congress (e.g. Kenneth Shepsle, Barry Weingast), international cooperation (e.g. Robert Keohane, Barbara Koremenos), and the establishment and persistence of electoral systems (e.g. Adam Przeworski).  Robert Keohane was influenced by NIE, resulting in his influential 1984 work of International Relations, After Hegemony: Cooperation and Discord in the World Political Economy. 
Herbert A. Simon criticized NIE for solely explaining organizations through market mechanisms and concepts drawn from neoclassical economics.  He argued that this led to "seriously incomplete" understandings of organizations.  Jack Knight and Terry Moe have criticized the functionalist components of NIE, arguing that NIE misses the coercion and power politics involved in establishing and maintaining institutions.   
Although no single, universally accepted set of definitions has been developed, most scholars doing research under the methodological principles and criteria follow Douglass North's demarcation between institutions and organizations. Institutions are the "rules of the game", both the formal legal rules and the informal social norms that govern individual behavior and structure social interactions (institutional frameworks). 
Organizations, by contrast, are those groups of people and the governance arrangements that they create to co-ordinate their team action against other teams performing also as organizations. To enhance their chance of survival, actions taken by organizations attempt to acquire skill sets that offer the highest return on objective goals, such as profit maximization or voter turnout.  Firms, universities, clubs, medical associations, and unions are some examples.
Oliver Williamson characterizes four levels of social analysis. The first concerns itself with social theory, specifically the level of embeddedness and informal rules. The second is focused on the institutional environment and formal rules. It uses the economics of property rights and positive political theory. The third focuses on governance and the interactions of actors within transaction cost economics, "the play of the game". Williamson gives the example of contracts between groups to explain it. Finally, the fourth is governed by neoclassical economics, it is the allocation of resources and employment. New Institutional Economics is focused on levels two and three. 
Because some institutional frameworks are realities always "nested" inside other broader institutional frameworks, the clear demarcation is always blurred. A case in point is a university. When the average quality of its teaching services must be evaluated, for example, a university may be approached as an organization with its people, physical capital, the general governing rules common to all that were passed by its governing bodies etc. However, if the task consists of evaluating people's performance in a specific teaching department, for example, along with their own internal formal and informal rules, it, as a whole, enters the picture as an institution. General rules, then, form part of the broader institutional framework influencing the people's performance at the said teaching department.
Ronald Harry Coase was a British economist and author. Coase received a bachelor of commerce degree (1932) and a PhD from the London School of Economics, where he was a member of the faculty until 1951. He was the Clifton R. Musser Professor of Economics at the University of Chicago Law School, where he arrived in 1964 and remained for the rest of his life. He received the Nobel Memorial Prize in Economic Sciences in 1991.
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point of view. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick. Market failures are often associated with public goods, time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, or externalities.
"The Nature of the Firm" (1937) is an article by Ronald Coase. It offered an economic explanation of why individuals choose to form partnerships, companies, and other business entities rather than trading bilaterally through contracts on a market. The author was awarded the Nobel Memorial Prize in Economic Sciences in 1991 in part due to this paper. Despite the honor, the paper was written when Coase was an undergraduate and he described it later in life as "little more than an undergraduate essay."
In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. The idea that transactions form the basis of economic thinking was introduced by the institutional economist John R. Commons in 1931, and Oliver E. Williamson's Transaction Cost Economics article, published in 2008, popularized the concept of transaction costs. Douglass C. North argues that institutions, understood as the set of rules in a society, are key in the determination of transaction costs. In this sense, institutions that facilitate low transaction costs, boost economic growth.
Oliver Eaton Williamson was an American economist, a professor at the University of California, Berkeley, and recipient of the 2009 Nobel Memorial Prize in Economic Sciences, which he shared with Elinor Ostrom.
Institutions are humanly devised structures of rules and norms that shape and constrain individual behavior. All definitions of institutions generally entail that there is a level of persistence and continuity. Laws, rules, social conventions and norms are all examples of institutions. Institutions vary in their level of formality and informality.
From a legal point of view, a contract is an institutional arrangement for the way in which resources flow, which defines the various relationships between the parties to a transaction or limits the rights and obligations of the parties.
Law and economics, or economic analysis of law, is the application of microeconomic theory to the analysis of law, which emerged primarily from scholars of the Chicago school of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated. There are two major branches of law and economics; one based on the application of the methods and theories of neoclassical economics to the positive and normative analysis of the law, and a second branch which focuses on an institutional analysis of law and legal institutions, with a broader focus on economic, political, and social outcomes, and overlapping with analyses of the institutions of politics and governance.
In law and economics, the Coase theorem describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasean bargaining. This 'theorem' is commonly attributed to Nobel Prize laureate Ronald Coase.
Douglass Cecil North was an American economist known for his work in economic history. He was the co-recipient of the 1993 Nobel Memorial Prize in Economic Sciences. In the words of the Nobel Committee, North and Fogel "renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change."
New institutionalism is an approach to the study of institutions that focuses on the constraining and enabling effects of formal and informal rules on the behavior of individuals and groups. New institutionalism traditionally encompasses three strands: sociological institutionalism, rational choice institutionalism, and historical institutionalism. New institutionalism originated in work by sociologist John Meyer published in 1977.
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behavior. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the other. Its name and core elements trace back to a 1919 American Economic Review article by Walton H. Hamilton. Institutional economics emphasizes a broader study of institutions and views markets as a result of the complex interaction of these various institutions. The earlier tradition continues today as a leading heterodox approach to economics.
The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market. Firms are key drivers in economics, providing goods and services in return for monetary payments and rewards. Organisational structure, incentives, employee productivity, and information all influence the successful operation of a firm in the economy and within itself. As such major economic theories such as Transaction cost theory, Managerial economics and Behavioural theory of the firm will allow for an in-depth analysis on various firm and management types.
Armen Albert Alchian was an American economist. He spent almost his entire career at the University of California, Los Angeles (UCLA). A major microeconomic theorist, he is known as one of the founders of new institutional economics and widely acknowledged for his work on property rights.
Government failure, in the context of public economics, is an economic inefficiency caused by a government intervention, if the inefficiency would not exist in a true free market. The costs of the government intervention are greater than the benefits provided. It can be viewed in contrast to a market failure, which is an economic inefficiency that results from the free market itself, and can potentially be corrected through government regulation. However, Government failure often arises from an attempt to solve market failure. The idea of government failure is associated with the policy argument that, even if particular markets may not meet the standard conditions of perfect competition required to ensure social optimality, government intervention may make matters worse rather than better.
Steven Ng-Sheong Cheung is a Hong Kong-born American economist who specializes in the fields of transaction costs and property rights, following the approach of new institutional economics. He achieved his public fame with an economic analysis on China open-door policy after the 1980s. In his studies of economics, he focuses on economic explanation that is based on real world observation. He is also the first to introduce concepts from the Chicago School of Economics, especially price theory, into China. In 2016, Cheung claimed to have written "1,500 articles and 20 books in Chinese" during his academic career.
Harold Demsetz was an American professor of economics at the University of California at Los Angeles (UCLA).
Property rights are constructs in economics for determining how a resource or economic good is used and owned, which have developed over ancient and modern history, from Abrahamic law to Article 17 of the Universal Declaration of Human Rights. Resources can be owned by individuals, associations, collectives, or governments.
"The Problem of Social Cost" (1960) by Ronald Coase, then a faculty member at the University of Virginia, is an article dealing with the economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Coase's belief that legal rules are only justified by reference to a cost–benefit analysis, and that nuisances that are often regarded as being the fault of one party are more symmetric conflicts between the interests of the two parties. If there are sufficiently low costs of doing a transaction, legal rules would be irrelevant to the maximization of production. Because in the real world there are costs of bargaining and information gathering, legal rules are justified to the extent of their ability to allocate rights to the most efficient right-bearer.
Organizational economics involves the use of economic logic and methods to understand the existence, nature, design, and performance of organizations, especially managed ones.