Abstract: This chapter looks at the institutions that are pertinent to economic development and at the institutional impediments to growth, drawing on several strands of the literature on organizational behaviour, including the New Institutional Economics. It begins with a discussion on informal mercantile institutions of trust, commitment, and enforcement, and then examines the strategic distributive conflicts behind institutional change. Next, it discusses the role of the state in building institutions, acknowledging the facts that there are states both strong and ‘soft’, and that the ‘soft budget constraint’ of the state gives rise to a credibility problem. An analysis of desirable state intervention—that which deals with market failures such as externalities and with coordination failures—and of distortional intervention involving rent-seeking and corruption follows. This positive analysis of policy making includes a principal-agent model in which the state acts like a Stackleberg leader.

Keywords: corruption, distributive conflict, institutions, intervention, market failures, New Institutional Economics, organizational behaviour, policy-making, rent-seeking, soft budget constraint,