What Is Institutional Economics About? How Transaction Cost Theory has its connection with Institutional Economics? Explain

Institutional economics focus on understanding the role of the evolutionary process & the role of the institutions in shaping economic behavior . Institutional economic emphasizes a broader study of the institutions & view market as a result of the complex interaction of their various institution .

(e.g individual , firm , states & social norms)

A important variants is the new institutional economic from the later 20th century , which integrates later development of neoclassical economics into the analysis.

Institutional economic is also known as institutionalism , school of economic that flourished in the United states during the 1920s & 30s . It view the evaluation of economic institutions as a part of broader process of cultural development .

Institutionalism never become a major school of economic thought , its influence has continued , particularly in the work of economic problems from a prospective that incorporates social & cultural phenomena . This board approach as useful in analyzing the problem of developing countries , where modernization of social institutions can be requirement for industrial progress .

Law & economic has been a major them since the publication of the legal foundation of capitalism by John R.commons in 1924 . Since then , there has been a heated debate on the role of the law ( a formal institution ) on economic growth .

Transaction costs theory ( Williamson 1979 , 1986 ) posits that the optimum organisational structure is one that achieves economic efficiency by minimizing the cost of exchange .

The theory suggests that each type of transaction produce co-ordination cost of monitoring , controlling & managing transactions . Williamson has defined T.S broadly as the running economic system of firm .

TRANSACTION COST CAN BE DIVIDED INTO THREE BOARD CATEGORIES :-

* search & information cost .

* bargaining & decision cost .

* policing & enforcement cost .

For ex ; The buyer of a used car faced a variety of different transactions cost

The search are the cost of finding a car & determining the car condition

The bargaining cost are the cost of negotiating a price with a car seller

The policing & enforcement cost are the cost of ensuring that the seller deliver the car in the promised condition

Institutions, understand as the set of the rules in a society , are key in determination of transaction costs .

In sense , institution that facilitate low transaction cost boast the economic growth .