Institutional analysis explores the ‘rules of the game’ of society. It seeks to identify the incentives created by formal and informal social rules and the consequences of people’s responses to these incentives. If we want to understand why political decision-makers behave as they do, why policies succeed or fail, why economies, individual industries or firms prosper or stagnate, we must examine the institutions that motivate and guide people’s actions.
We draw on institutional economics in the tradition of Ronald Coase, Douglass North, Oliver Williamson and Elinor Ostrom, who all stress that the fundamental problem for all economies and polities is how to ensure cooperation. Prosperity requires a rich set of institutions that support value-creating cooperation and punish improductive rent-seeking. Cultural beliefs, social norms, communities, private and public legal orders, political constitutions all play important roles.
Institutional analysis provides a powerful analytical toolkit. It focuses on property rights and contracts in a broad sense. Property rights specify who must cooperate with whom, while contracts define the terms of cooperation. For example, a policy can be interpreted as a complex set of contracts between several parties, including politicians, civil servants, interest groups and affected citizens.
At HETFA, we use institutional analysis to enhance our understanding of society and economy in Hungary and Central Europe as well as to evaluate and give advice on public policies.