New Institutional Economics : A Few Extensions

This article traces out the development of the New Institutional Economics (NIE). It delineates the literature into two interrelated themes of institutional environment and institutions of governance. The rules of the game of institutional environment determine governance choices. Inefficient institutional environment results in inefficient governance mechanisms which causes misutilization of scarce resources. Institutional environment evolves over time. This article demonstrates the evolution of institutions in response to shocks with analysis of historical examples. The prevailing literature over glorifies the colonial rule of the West for the emergence of capitalist institutions. It fails to explain success stories of Japan, Mainland China and South Korea. In case of India, its present success story of democracy and economy should be traced to its ancient civilization not just the British colonial rule. Detailed research by economists on institutional evolution and functioning of India will be a good contribution to the literature.