Institutional questions have become increasingly prominent in the evaluation of nearly every area of structural policy. The present article shows how formal economic analysis may be brought to bear on the problem of understanding institutions. It begins by reviewing the recent history of thought on the economics of organisations. It then outlines the fundamentals of transactions cost economics, a branch of economic theory which views organisations as a response to competitive pressures to align different ways of channelling or "governing" a transaction -- these governance forms include market, hybrid or hierarchy -- with the transactions requirements of different economic sectors. The paper then demonstrates the applicability of this theory, which represents a significant departure from the neo-classical theory of the firm, in such diverse areas as intermediate product markets, corporate finance and governance, the modern corporation, regulation and deregulation and the failure of ...
