Introduction

In an era of major changes across the globe in economic as well as political institutions, there should be little argument about the need for an analytical framework to help us understand the observed phenomena. In the past, the development of such a framework was obstructed by imperfect communication between “theorists” and “institutionalists.” Our objective here is to facilitate communication by integrating institutional phenomena into models that have been developed for the study of economies, voting systems, and organizations. Primarily, we are interested in economic institutions, but certain aspects of the model are general enough to be applicable to political and other social institutions as well. Indeed, these non-economic aspects cannot be ignored, since introduction, implementation, and enforcement of the rules are essential features of the model.

Our point of departure will be the theory of economic mechanisms (formalized, for example, as adjustment processes or game forms). Although this theory has had a normative orientation, we intend our framework to be usable for descriptive and explanatory analysis as well. We do not share the view that at the present stage formalization is premature. It seems important to make institutional phenomena amenable to analysis with tools that have resulted in progress in many areas of economics and other social sciences.

Before proceeding with details, let us clarify the intended meaning of the term “institution.” In common parlance, this term has two distinct meanings. To illustrate by example, we refer to such organizational entities as a university, a central bank, an ombudsman's office, or a state as institutions.