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New institutional economics (NIE) is an economic perspective that attempts to extend economics by focusing on the social and legal norms and rules that underly economic activity. Although NIE has its roots in Ronald Coase's fundamental insights about the critical role of institutional frameworks and transaction costs for economic performance, at present NIE analyses are built on a more complex set of methodological principles and criteria. They now depart from both mainstream Neoclassical economics and "old" institutional economics, though authors often care about both efficiency and distribution issues.

Among the many concepts/aspects that are often taken into account in current NIE analyses these can be mentioned: organizational arrangements, transaction costs, credible commitments, modes of governance, persuasive abilities, social norms, ideological values, decisive perceptions, gained control, enforcement mechanism, assets 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, bargaining strength, etc.

Major scholars associated with this school include Ronald Coase, Douglass North, Oliver Williamson, Claude Menard and Thrainn Eggertsson, to mention but a few. In 1997 they founded the International Society for New Institutional Economics.

Contents 1 Origins and definition 2 Institutional Levels 3 Further reading 4 External links

Ronald Coase is one of the NIE founders, and his classic works are inevitable NIE references, together with the contributions of the property-rights theory in the sixties and seventies .

However, it was through the articles and books published over the 1980s and 1990s that a more complete and coherent set of central core concepts, assumptions and criteria could in fact be gathered from the many self-labeled NIE contributions of the time. It was particularly so since the international seminar series on the New Institutional Economics began in 1983 and these debates were published in the Journal of Institutional and Theoretical Economics.

In 1997, when the International Society for the New Institutional Economics (ISNIE) was launched, a long way had already been traveled by those hundreds of scholars who participated in the inaugural ISNIE meeting. Ronald Coase and Douglass North had already received the Nobel prize award.

Of course, those events already belong to the NIE-ISNIE history. Historic are also those initial contributions mentioned in which transaction costs, property rights and few more concepts were combined in an attempt to just solve some limitations of standard neoclassical reasoning. As North (2005), Menard (2004), Menard and Shirley (2005), Eggertsson (2005), Toboso and Arias (2006) (see references below) and others make it easy to check, most analyses are now built on a much more comprehensive approach.

At the early nineties Erik Furubotn already was able to envisage the evolution in approach that was going to take place. He wrote that the future theoretical developments would likely be “in the direction of a more flexible and comprehensive political economy approach”. And it has turned out to be so concerning the analyses of transactions people take at different institutional frameworks. This is also the case concerning the articles that follow.

Although no single, universally accepted set of definitions has been developed, most scholars doing research under the NIE methodological principles and criteria follow Douglass North's demarcation between institutions and organizations. institutions are the "rules of the game", consisting of 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 they create to coordinate their team action against other teams performing also as organizations. Firms, Universities, clubs, medical associations, unions, etc. are some examples.

Because some institutional frameworks are realities always "nested" inside other broader institutional frameworks, this clear demarcation is always blurred in actual situations. A case in point is a University. When the average quality of its teaching services must be evaluated, for example, an University may be approached as an organization with its people, physical capital, the general governing rules common to all that were passed by the University governing bodies, etc. However, if the task consists of evaluating people's performance in a specific teaching department, for example, along with their own made internal formal and informal rules, then the University as a whole enters the picture as an institution. General University rules, then, form part of the broader institutional framework influencing people's performance at the said teaching deparment.

This is why scholars usually divide institutional frameworks into several levels.

• Level 1 consists of embedded informal institutions; these include traditions, customs, values and religion. These institutions arise spontaneously over a long period of time and are very slow to change. North asks, “What is it about informal constraints that gives them such a pervasive influence upon the long run character of economies?” The answer is unknown but many lower level institutions are designed to protect Level 1 institutions.
• Level 2 is where formal rules (legal rules) are created, for instance, Constitutions and General Laws defining the rules of the game. Major changes at this level are rare but are often preceded by major upheavals such as the Civil War or the American Revolution. Marginal legislative reforms are frequent however.
• Level 3 is the level of governance when more detailed organizational rules exit. Level 3 is also the level at which the game is played. Cooperation and conflict, exchange and bargaining, efficiency and distributive issues enter here into the equation. These organizational rules usually serve to falicitate the resolution of conflicts and realize mutual gains by at least a significant part of participants in each arena. Attempts to collectively reform this governance structures are also frequent.

• Oliver E. Williamson (September, 2000). "The New Institutional Economics: Taking Stock, Looking Ahead" Journal of Economic Literature, vol. 38, pp. 595-613.
• North, Douglass C. (1993 working paper). "New Institutional Economics and Development".
• North, Douglass C. (1997). "Understanding Economic Change", in Transforming Post-Communist Political Economies, Joan M. Nelson, Charles Tilly and Lee Walker, eds., Washington D. C.: National Academy Press. pp. 13-18.
• Eggertsson, T. (2005). "Imperfect Institutions. Opportunities and Limits of Reform". University of Michigan Press.
• Menard, Cl. (Ed.) (2004), "The International Library of the New Institutional Economics" (7 vols.). Edwar Elgar, Cheltenham.
• Menard C. and Shirley, M. (eds.) (2005). "Handbook of New Institutional Economics". Edwar Elgar, Cheltenham.
• North, D.C. (2005). "Understanding the Process of Institutional Change". Princeton University Press.
• Toboso, F. (2001). "Institutional Individualism and Institutional Change: the Search For a Middle Way Mode of Explanation", Cambridge Journal of Economics, vol. 25, n.6, November, pp. 765-784.
• Toboso, F. and Arias, X.C. (eds.) (2006). "Organizing Governments and Markets. Some Case Studies from a NIE Perpective". PUV-Universitat de València, (Edited jointly with the Universidad de Vigo). (In Spanish)

• Introduction to new institutional economics
• ISNIE - International Society for New Institutional Economics.
• ESNIE - European School on New Institutional Economics.
• Introductory Reading List in New Institutional Economics - The Ronald Coase Institute
• IRIS Center - Founded by Mancur Olson, University of Maryland.
• Contracting and Organizations Research CenterUniversity of Missouri
• Economics and Institutions WEBSITE - by prof. F. Toboso, University of Valencia, Spain.