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New institutional economics (NIE) is an economic perspective that attempts to extend economics by focusing on the institutions (that is to say the social and legal norms and rules) that underlie economic activity and with analysis beyond earlier institutional economics and neoclassical economics. Unlike neoclassical economics, it also considers the role of culture and classical political economy in economic development.
The NIE assume that individuals are rational and that they seek to maximize their preferences, but that they also have cognitive limitations, lack complete information and have difficulties monitoring and enforcing agreements. As a result, institutions form in large part as an effective way to deal with transaction costs.
NIE rejects that the state is a neutral actor (rather, it can hinder or facilitate effective institutions), that there are zero transaction costs, and that actors have fixed preferences.
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