ABSTRACT
The objective of new institutional economics is to explain the emergence, logic, transformation, and disappearance of institutions. Adverse selection and moral hazard create high transaction costs on markets, eventually resulting in market failures and incomplete markets. Market failures can induce institutional innovations to overcome the hurdles to the transaction, or to collective action, and capture the unrealized gains. There are basically two major market failures that justify choosing a sharecropping contract: insurance market failure and credit market failure. Producers’ organizations, service cooperatives, and vertical integration across firms in the value chain are all institutions that help reduce transaction costs on markets and increase efficiency. These forms of institutional innovation build relational social capital. New institutions such as contracts, organizations, laws, regulations, and redefinitions of property rights may emerge to reduce the information problem and the associated transaction costs. Decentralization implies the devolution by central government of administrative, political, and/or economic functions to local governments.
