The Institutional Economics of Water
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The Institutional Economics of Water

A Cross-Country Analysis of Institutions and Performance

R. Maria Saleth and Ariel Dinar

This outstanding new book provides the most detailed and comprehensive evaluation of water reform and water sector performance from the perspectives of institutional economics and political economy.
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Chapter 2: Understanding Institutions: Nature, Performance, and Change

R. Maria Saleth and Ariel Dinar


The institutional underpinnings of development, in both the general and water sector contexts, are increasingly recognized because the policy prescriptions based on the neoclassical approach and on public choice theory have proved equally ineffective in many contexts. In the context of natural resource management, with all its many forms of externalities, neither the price mechanism nor the creation of property rights can provide a durable solution. Therefore, policy prescriptions, which have moved from ‘getting the prices right’ to ‘getting the property rights right,’ now center on ‘getting institutions right’ (Williamson 1994: 3). For a better appreciation of this policy shift and as background for our subsequent analysis, we begin with a short but critical review of the theoretical literature on institutional economics. The review focuses on the nature and definitions of institutions, their key features and their analytical and methodological implications, the relation between institutions and economic performance, theories of institutional change, and the forces initiating and sustaining the process of institutional change in a generic context. INSTITUTIONS: NATURE AND DEFINITION Institutions are a pervasive phenomenon with diverse origins as they affect various dimensions of human relationships and interactions. Consequently, they have diverse definitions and interpretations, reflecting different disciplinary perspectives and theoretical traditions. But, beneath this diversity lies an undercurrent of convergence on the generic meaning and purpose of institutions. This section will show this convergence by sifting through various interpretations and definitions of institutions presented in the literature. Institutions, Knowledge, and Information Simon observes that ‘it is because...

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