Institutions, Modern Debates, and Inequality

Ronald Coase (1910-2013), in his articles "The Nature of the Firm" (1937) and "The Problem of Social Cost" (1960), founded what became known as new institutional economics by introducing the concept of transaction costs, the costs of negotiating, monitoring, and enforcing agreements. Coase used this concept to explain why firms exist in the first place, namely to economize on the transaction costs that would otherwise be incurred by coordinating production entirely through market contracts, and to show that, when transaction costs are low, the initial assignment of property rights does not affect the efficiency of the eventual outcome, a proposition later dubbed the "Coase theorem." Coase won the Nobel Memorial Prize in Economic Sciences in 1991.