Institutional and Organizational Analysis: Concepts and Applications

By Eric Alston (University of Colorado Boulder), Lee Alston (Indiana University Bloomington), Bernardo Mueller (University of Brasilia), and Tomas Nonnenmacher (Allegheny College, Pennsylvania)

Today, the notion that “institutions matter” is broadly accepted.  Scholars have generated a rich literature on the causes and effects of institutions spanning from the micro to the macro level. The pioneering work of Buchanan, Coase, North, Ostrom, Williamson, and many others is the fertile soil in which the literature in Institutional and Organizational Analysis (IOA) has taken root and blossomed. There is a wealth of institutional scholarship that now spans disciplines, decades, and continents. Our 2018 book with Cambridge University Press, Institutional and Organizational Analysis: Concepts and Applications, expands on many of the major contributions in this area, organized within a framework that explains both the effects and determinants of institutions and norms.

Our book is centered on the insight that institutions and norms are fundamental determinants of economic and political development. Institutions are rules that recognized authorities create, and choose whether or not to enforce. Norms are long-standing patterns of behavior, shared by a subset of people in a society or organization. Institutions and norms play a role in all organizations, including governments, firms, churches, universities, gangs, and even families. In our book, we (1) present a set of concepts—for example, institutions, norms, property rights, and transaction costs—used in IOA that link institutions and norms to economic performance; (2) use the same set of concepts to better understand political organizations and performance; and (3) build a framework based on those concepts for understanding divergent developmental trajectories of nations around the world. In Parts I and II, we define the concepts needed to understand how economic activity is organized and how institutions and norms shape economic and political outcomes. In Part III, we add the comparatively recent work on beliefs and leadership to better understand the fundamental question of why there has not been convergence in economic and political performance across countries. In the following paragraphs, we summarize the three parts of our book in greater detail, which is intended as a useful reference for advanced students and scholars alike.

In Part I of the book, we link institutions to property rights, transaction costs, and economic performance. In Chapter 1, we examine how institutions and norms shape property rights. Property is a social construct; that is, property rights define our ability to use different aspects of an asset. In Chapter 2, we define transaction costs as the costs of “transfer, capture, and protection” of property rights. Transaction costs are a key determinant of organizational and contractual choice. In Chapter 3, we analyze how different types of transaction costs shape the structure of contracts and organizations. The price mechanism and hierarchies can be thought of as endpoints on a spectrum of contractual choices, and we provide a theoretical justification for and examples of different intermediary forms.

In Part II, we explain the determinants of institutions taking as fixed the basic constitutional rules and current economic performance. In the four chapters, we analyze the process through which groups and individuals lobby and government supplies laws and regulations. In Chapter 4, we address the role and impact of interest groups on government policy. Every policy is potentially redistributive, so firms and individuals organize to influence redistribution in their favor. In Chapter 5, we assess the roles of the legislature and the executive as the organizations in charge of creating and implementing legislation. In Chapter 6, we address the role of the bureaucracy and its impacts on the content, quality, and effectiveness of the outcomes of laws. In Chapter 7, we analyze how institutions can influence the structure and output of the judiciary. We also examine the impact that judiciaries have on institutions and norms.

Simple economics suggest that countries should have converged in terms of economic and political development. Moreover, scholars in the IOA have spilled a lot of ink in showing the socially beneficial institutions that accompany development. But despite an increasingly well-known institutional template, countries have not converged in terms of economic and political development and, in many cases, have outright declined. A number of explanations to this puzzle have emerged: (1) it is not in the interest of those in power to have economic and political development; (2) poorer countries have not converged because the volatility of their growth rates means such economies are as likely to shrink as grow; and (3) a change in fundamental core beliefs about how institutions affect outcomes is required to break out of the status quo. In Part III, we discuss the role of core beliefs and leadership in bringing about changes to constitutional-level institutions. Though we do not directly analyze culture or ideas as a determinant, we recognize their importance as background conditions that determine which belief changes take place. We stress leadership for its coordinative function within a dominant network that is negotiating how to respond to either an existing shock or a foreseeable crisis that could be attenuated or avoided, provided sufficient institutional change occurs.

Further, we identify fruitful avenues for research within each of our referential frames of institutional and organizational analysis, from the economic to the political to the constitutional. Our text provides useful background for the future areas of research we suggest by laying out many of the foundational contributions of the emerging discipline. It is our hope that the text will serve as a resource in helping to define the still emerging field of IOA. Our book is relevant for advanced undergraduates, as well as a valuable reference for graduate students and scholars. The analysis of the emergence and evolution of complex rule sets has proven to be one of the most illuminating areas of economic study over the course of the past century, and we accordingly describe how much more we think the field has to contribute.