Defining and Measuring Institutions

The fundamental question regarding the NIE literature and its application to transition economics is also the simplest: What exactly is an “institution?” As Geoffrey Hodgson astutely pointed out, “it is not possible to carry out any empirical or theoretical analysis of how institutions … work without having some adequate conception of what an institution … is” (Hodgson 2006: 1). While there is a well-developed philosophical literature attempting to tackle this issue (North 1990, Hodgson 2006, and Voigt 2009a bracket the debate), for the most part the empirical literature has avoided the question; thus, lack of a precise definition of this central term has led to difficulties econometrically, with the concept of “institutions” being defined by the model and the data, rather than a concrete conception of “institutions” defining the model. Indeed, the current muddled view of “institutions” has led to empirical investigations encompassing all manner of “institutions” across all spheres: as recent research by Stefan Voigt (2009) noted, “in the literature, newspapers, supermarkets, and even phone booths have been described as institutions” (Voigt 2009a: 2).