Behavioral Economics For Dummies®

Chapter 14

Why Institutions Matter

In This Chapter

Looking at institutions from a behavioral economics perspective

Introduction the New Institutional Economics

Understanding why institutions matter for wealth creation

In the world of economics, the term institutions is bandied about as if everybody knows what it means. But often economists use this word differently from the way non-economists do. In economic parlance, an institution consists of constraints that help structure behavior in the economic realm. Some examples of institutions include religion, culture, social norms, markets, and the rules and regulations that flow from government and their agencies.

A long-held assumption in economics is that institutions don’t matter to economic performance because the right institutions will be in place to make for an efficient economy. There’s no room for improvement.

There may be a few cents lying on the sidewalk (minor opportunities for gain), but certainly not billions of dollars. As the joke goes, if an economist sees a buck on the sidewalk, he’ll step over it because he assumes that the money isn’t there. The institutional environment is assumed to be just right to eliminate all ...