Comparative and Historical Institutional Analysis

1. Introduction It is widely recognized that institutions matter. Indeed, recent econometric analyses have provided ample empirical support to the claims that various proxies of institutions' effectiveness such as measures of risk of property expropriation influence economic outcomes. The challenge of institutional analysis, therefore, is to advance beyond exploring the implications of institutions based on various proxies and develop a deeper understand the micro mechanisms that underpin the operation of institutions and their implications. Utilizing the view of institutions as rules and contracts, institutionalists have contributed much to such an analysis. More recently, however, it has become recognized that such view of institutions, and the associated analytical frameworks-such as transaction costs economics, public choice, and contract theory-forestall addressing a large number of substantiative issues. Among these are the study of institutional foundations of the markets in the absence of the state, the institutional foundations of states, the interrelationships between formal and informal institutions, the cultural and social foundations of institutional development. 2 Examining such issues necessitates considering rules of behavior that are regularly followed and contracts that people enter and adhere to as reflecting more fundamental forces. In other words, it necessitates 1996) are classical expositions in economics. 2 considering as endogenous more behavior than can be done using the above analytical frameworks. In the early 1990s, therefore, an alternative concept of institutions and other analytical frameworks began to be used to address such issues. This paper reviews the conceptual and analytical foundations of this line of research which examines institutions as self-enforcing and studies them as equilibrium phenomena in strategic situations. Until the early 1990s, the main approach used by economists for positive institutional analysis defined institutions as either rules or contractual relationships. This approach posits that the operation of markets is the key to growth (Smith 1776 [1937]), and their operation depends on a clear specification of property rights (Coase 1960). This implies that the most important rules are those that allocate property rights. (North 1981). Given an allocation of property rights, economic agents use contracts and establish organizations to minimize the transaction costs of exchange (Coase 1937, Williamson 1985). Contractual relationships among individuals and within and across organizations are selected based on the attributes of the relevant transactions in an optimal manner. Distinct property rights allocations can have, however, distinct efficiency implications because of the transaction costs of transferring rights to those who can use them most …