Thrainn Eggertsson

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Thrainn Eggertsson (born April 23, 1941) is an Icelandic economist and Professor of Economics at the University of Iceland, known for his work on New Institutional Economics and Neoinstitutional Economics.


  • Modern theory identifies several sources of economic growth, such as capital accumulation, new techniques, secure property rights and contracts, and absence of rent seeking. This paper introduces new social technologies as yet another source of growth and emphasizes our incomplete knowledge of social systems. I introduce a framework for analyzing institutional policy and use the case of modern biotechnology to explain how uncertainty about social technologies, persuasion, and competing beliefs influence the evolution of property rights.
    • Thrainn Eggertsson (2009). "Knowledge and the theory of institutional change," in: Journal of Institutional Economics, Vol. 5, (2), August 2009, pp. 137-150; Abstract

Economic behavior and institutions. 1990


Tráinn Eggertsson (1990), Economic behavior and institutions: Principles of Neoinstitutional Economics. Cambridge University Press

  • This book grew out of my interest in organizational forms and institutional arrangements and their impact on economic outcomes. Price theory or microeconomics, in its conventional form, treats organizations and institutions the same way as it treats the law of gravity: These factors are implicitly assumed to exist but appear neither as independent nor as dependent variables in the models. Such economy in model making can be eminently reasonable. It enables us to isolate critical relationships and simplifies the use of mathematical tools in the analysis. However, unlike the law of gravity, organizations and institutions are not invariant; they vary with time and location, with political arrangements and structures of property rights, with technologies employed, and with physical qualities of resources, commodities, and services that are exchanged. In fact, production involves not only the physical transformation of inputs into outputs but also the transfer of property rights between the owners of resources, commodities, and labor services. In the transfer of rights, whether within firms or across markets, agents maximize their objective functions subject to the constraints of organizations and institutions.
    • p. ix Preface
  • In 1984, I set out to investigate whether my demand for institutional analysis had created its own supply, whether the thesis of institution-free economics had created its antithesis. My working rule was to limit the study to contributions that did not alter the core of the economic approach, particularly the rational-choice model, and to seek a new synthesis of neoclassical and institutional economics. Neoinstitutional Economics is the term I use.
    • p. xii
Part I. Introduction to the theory
  • In general terms, transactions costs are the costs that arise when individuals exchange ownership rights to economic assets and enforce their exclusive rights. A clear definition of transactions costs does not exist, but neither are the costs of production in the neoclassical model well defined.
    • p. 14
  • The tardy introduction of transaction costs into economic theory is related to the fact that, until recently, most economic theories and models assumed full information, and transaction costs are in one way or another associated with the cost of acquiring information about exchange. But the concepts of information costs and transaction costs are not identical. A lonely person on a desert island will encounter information costs as he goes about his "home production," but an isolated individual does not engage in exchange and therefore will have no transaction costs.
    • p. 14-15
  • The concept of state ownership is particularly ambiguous. In a democratic society, state property may have some of the characteristics of common property; for instance, the citizens usually do not have the right to sell their individual titles to public property, whereas under dictatorship, state ownership can approach the system of private property with the economy resembling a huge corporation.
    • p. 37
  • Let us define institutions as sets of rules governing interpersonal relations, noting that we are talking about formal political and organizational practices.
    • p. 70
Part II. Property rights and economic outcomes
  • Without the state, its institutions, and supportive framework of property rights, high transaction costs will paralyze complex production systems, and specific investments involving long-term exchange relationships will not be forthcoming.
    • p. 317
  • Demsetz (1980) refers to the hypothetical economic system of neoclassical economics as the decentralized model. According to the usual implicit and explicit assumptions of the decentralized model, the cost of information is zero; private property rights are fully defined and enforced at zero cost; and the state stays in the background, upholding the institutions of market exchange. Economic outcomes derived from this model are found in the standard textbook: For any underlying distribution of resources, wealth is maximized; output is valued by consumers who take indirectly into account the value of leisure and other extra-market activities; income distribution depends on wages and the prices of nonhuman inputs which equal the value of marginal products; and economic resources always find their highest-valued uses.
When transaction costs are added to the decentralized model, we have, according to Demsetz, a laissez-faire economy, a term we shall use below. The laissez-faire model is used to analyze the implications of competition when the cost of transacting is positive.
In a laissez-faire economy, the state does not restrict private ownership rights, but because of information costs, ownership rights are often less than fully defined or enforced. Laissez-faire competition, reacting to these costs, reveals itself in ways not readily understood in terms of the decentralized model
  • p. 130-1,
Part III. Explaining economic organization
  • Adam Smith began his Wealth of Nations with an examination of the internal works of a pin factory, but he soon turned his attention to other things: the coordination of a market system and the economics of growth and development. For more than a century and a half following the publication of Smith's masterpiece, the nature and internal organization of the firm received little attention in mainstream economic theory.
    • p. 157
  • When analyzing the nature of the firm, the new literature tends to emphasize two aspects: A firm involves a set of long-term contracts between input owners, and a firm replaces the product market with a factor market where price signals play a relatively small role (as output is not measured continuously and sold for a price) and, typically, hierarchical relationships are substituted for market exchange.
    • p. 159
Part IV. Explaining property rights
  • We begin by introducing what we refer to as the naive theory of property rights and its application in several areas. The naive theory looks at the emergence or nonemergence of exclusive rights in terms of the costs and benefits of exclusion and the cost of internal governance when individuals share property rights.
    • p. 249

Quotes about Thráinn Eggertsson

  • The emergence of New Institutional Economics toward the end of the twentieth century profoundly changed our ideas about the organization of economic systems and their social and political foundations... In Imperfect Institutions Thráinn Eggertsson extends his attempt to integrate and develop the new field that began with his acclaimed Economic Behavior and Institutions (1990), which has been translated into six languages. This latest work analyzes why institutions that create relative economic backwardness emerge and persist and considers the possibilities and limits of institutional reform. Thráinn Eggertsson is Professor of Economics at the University of Iceland and Global Distinguished Professor of Politics at New York University. Previously published works include Economic Behavior and Institutions (1990) and Empirical Studies in Institutional Change with Lee Alston and Douglass North (1996).
    • Thráinn Eggertsson (2005). Imperfect Institutions: Possibilities and Limits of Reform. University of Michigan Press