On the nature of institutions

Abstract

This paper attempts to conceptualize the institution as a determinant of economic activity of societies and to define the sources of institutional change in modern economy. The analysis of institutions and their role in the economic activity, on the level of particular entities and markets or in the macroeconomic scale, seems to be the most productive area of research in the 21st century. A cohesive institutional system is a prerequisite of economic change in less-developed countries and a determinant of sustainable development in other economies. Institutions are believed to be the cause of economic failure of many countries. Thus, to create a favourable environment for economic progress, it is necessary to adopt adequate, country-specific formal instruments. Despite the intensity of research, the essence of the institution and the character of its change still remain a matter of dispute. The diversity of institutions and their impact make them difficult to measure. There are no perfect indicators of institution status or quality. The lack of fully adequate indicators of the quality of institutions and institutional environment makes it difficult to verify empirically the research on the influence of institutions on the dynamics of economy and its particular elements.