Institutional Change, Market Evolution, and Informal Contractual Arrangements

The major developments in the study of institutional economics in recent years has greatly deepened people's understanding of institutional change and market evolution. Generally speaking, institutional change is headed in the general direction of the continuous reduction of market transaction costs, allowing the owners of all sorts of resources to realize to the greatest extent possible their behavior in the course of transaction, and at the same time, to cause resources to flow into the hands of those for whom their use value would be the greatest, thus promoting the growth of the economy (North and Thomas, 1973). According to the general theory of institutional change, there are two types of institutional arrangements: first, fundamental institutional arrangements, and second, secondary institutional arrangements. In a gradualistic process of historical change, secondary institutional changes may well take place before there is a fundamental institutional change. "Such changes that have the effect of deviating from, amending, and modifying, or circumventing the existing fundamental institutional arrangement will continue to generate pressure, thus eventually bringing about more radical change in the fundamental institutional arrangement" (North and Thomas, 1971).