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Institutions

  • Douglass C. North

Institutions are the humanly devised constraints that structure political, economic, and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights). Throughout history, institutions have been devised by human beings to create order and reduce uncertainty in exchange. Together with the standard constraints of economics they define the choice set and therefore determine transaction and production costs and hence the profitability and feasibility of engaging in economic activity. They evolve incrementally, connecting the past with the present and the future; history in consequence is largely a story of institutional evolution in which the historical performance of economies can only be understood as a part of a sequential story. Institutions provide the incentive structure of an economy; as that structure evolves, it shapes the direction of economic change towards growth, stagnation, or decline. In this essay, I intend to elaborate on the role of institutions in the performance of economies and illustrate my analysis from economic history.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.5.1.97
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 5 (1991)
Issue (Month): 1 (Winter)
Pages: 97-112

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Handle: RePEc:aea:jecper:v:5:y:1991:i:1:p:97-112
Note: DOI: 10.1257/jep.5.1.97
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  1. Posner, Richard A, 1980. "A Theory of Primitive Society, with Special Reference to Law," Journal of Law and Economics, University of Chicago Press, vol. 23(1), pages 1-53, April.
  2. de Roover, Florence Edler, 1945. "Early Examples of Marine Insurance," The Journal of Economic History, Cambridge University Press, vol. 5(02), pages 172-200, November.
  3. Douglass C. North, 1955. "Location Theory and Regional Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 63, pages 243.
  4. Stiglitz, Joseph E, 1989. "Markets, Market Failures, and Development," American Economic Review, American Economic Association, vol. 79(2), pages 197-203, May.
  5. Watts, Ross L & Zimmerman, Jerold L, 1983. "Agency Problems, Auditing, and the Theory of the Firm: Some Evidence," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 613-33, October.
  6. Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-31, March.
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