The Causes of Institutional Inefficiency: A Development Perspective

The present paper intends to examine the four most important approaches to institutions as they now prevail in the economic literature. These are: the transaction-cost approach, the principal-agent approach, the equilibrium-of-thegame approach, and the evolutionary approach. Each approach will be succinctly presented and, in a second step, the question as to whether institutions can be inefficient is raised. If the answer is yes, then the reasons why will be addressed according to each case. The idea is that indeed an important cause of economic backwardness lies in the persistence of inefficient institutions and, therefore, the pertinence of the economic analysis of institutions should be judged in the light of its ability to explain the persistence of this institutional inefficiency.