Introduction

The purpose of this chapter is to probe into the issue of inefficient institutions. Toward that end, I intend to look at the different strands that form the so-called new institutional economics (NIE), and raise the question for each of them as to whether institutions can be inefficient and, if yes, for what reasons. Four economic approaches are reviewed, and these regard and depict institutions as the outcome of individual interactions. These are: the transaction-cost approach; the principal–agent approach; the equilibrium-of-the-game approach; and the evolutionary approach. The discussion will proceed in four successive sections, from Section 21.2 to Section 21.5. In each of these sections, the main features of the approach concerned – how institutions are defined and analyzed – will be summarized before addressing the issue of institutional efficiency proper. Section 21.6 will briefly conclude.

The transaction-cost approach

The transaction-cost (TC) approach is not only well known, but is frequently considered to be the core approach of NIE. A major reason for such a special treatment is historical: pioneers and advocates of this approach (Coase 1960; Williamson 1985; Barzel 1989) have actually established and popularized the name of NIE, helping to convey the message that economists have again begun to be interested in institutions after an eclipse of almost one century (Platteau 2000).