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The Economics of Institutions: Avoiding the Open-Field Syndrome and the Perils of Path Dependence

Department of Economics, University of Iceland

In this article, recent research on the economics of institutions is summarized and assessed The economics of institutions is an attempt to integrate recent research in various sub-fields of economics and the other social sciences in order to present a coherent research program for exploring the link between institutions and wealth Although the core of the framework is a modified version of neo-classical economics, it is argued that the optimal deviation from the neo-classical model vanes with the level of analysis and the types of variables that we seek to endogenize. The unifying theme of the analysis is the introduction of transaction costs and the related concept of property rights, which give organizations and institutions a central role in economic life. The paper provides a summary view of the economics of institutions, and discusses in some detail two common lines of criticism. that the approach ignores power relationships in economic affairs, and that its use of the rational choice model is inappropriate The need for augmenting the economics of institution with an operational theory of mental models and learning is recognized.

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