New Institutional Economics and Political Economy

New Institutional Economics (NIE), as defined by ISNIE, the International Society for New Institutional Economics, is an interdisciplinary enterprise combining economics, law, organization theory, political science, sociology and anthropology. Although NIE borrows liberally from various disciplines, its primary language is economics. Its goal is to explain what institutions are, how they arise, what purposes they serve, how they change and how they can be reformed.

Political economy goes further into taking apart the “black box” of policymaking and illustrates how tools of economics can be applied to the areas traditionally reserved for political science. This approach, the public choice theory, was developed by a Nobel-prize winner James Buchanan. It studies behavior of voters, politicians, and the electorate modeled as agents (mostly) pursuing self-interest. Based upon that assumption, public choice explores how people respond to incentives and act within constraints of alternative governance systems. Designing such just and efficient “rules of the game” is a key challenge of development.