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Institutional Economics



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Corporate Governance is really a branch of Institutional economics which studies how institutions - the rules of the gamle - shape economic behaviour and affect economic welfare.Institutions like markets, hierachies, governments and cultures have economic costs and benefits. They can be deployed more or less wisely creating the posperous or poor societies.




Economists have studied institutions for a long time. Adam Smith and Karl Marx were concerned with instituions and particularly with ownership of the means of productrion. The central question os policial economy is arguably defiing the proper scope of government. How much should the government do and how much should be left to the market?


In recent decades a "new institutional economics" has emerged thorugh the contributions of Nobel laureates suchs as Ronald Coase, Oliver Williamson, Kenneth Arrow, James Buchanan and Douglas North. The central theme is that there are costs and benefits of economic institutions or ecnomic systems which essentially determine how economies work.


All economic institutions essentially serve the same purpose: coordination of economic activity or in other words making societies work together.


We now know that the disttinction between governments and markets is important, but also overly simplistic because there are many other economic institutions - like unions, associations, business firms or even social norms.  Theore are many ways of organizing governments which can for example be more or less democratic. There are also many kinds of markets and many ways to governmen business firms (which we study under the heading of "corporate governance"). Institutional economics is concerned with finding out what institutions can most efficiently organize economic acitivity. Ideally, institutions should minimize transaction costs - the costs of running the economics system..


Transaction costs essentially originate in human limitations such as bounded rationality and self interest seeking. Economic institutions need to take these limitations into consideration and coordinate behavior as well as possible under the circumstances. 






In a new book with Martin Conyon, Corporate governance: Mechanisms and Systems, I try to provide a grand view of the field.




Mechanisms such as ownership, boards, incentives and regulate work to provide companies with control and direction. Countries combine them to form systems.