New Institutional Economics (NIE) expands neo-classical economic theories by incorporating property rights and transaction costs into neo-classical economics to explain economic behaviour. The origins of property rights and transaction costs stems from Coase (1960). A detailed discussion of New Institutional Economics can be found in Eggertsson (1990). Reference details of these works can be found in my selected bibliography.

Property rights are rules that define or delimit the range of activities granted to individuals in specific assets. This includes the right to use an asset, the right to derive income from an asset, the right to transfer ownership of an asset, and the right to exclude others from using this asset. Property rights structure the incentives present in an economic system which in turn influences economic behaviour of each economic agent. Transaction costs are resource costs that have to be incurred to achieve market or political exchange.

NIE is still at a developmental stage and the use of mathematical models is less pronounced in this approach. The emphasis, however, is on stronger empirical testing rather than a concentrated focus on formulating theoretical models devoid of realism. NIE stresses the need to explore how the definition and enforcement of property rights influence the manner in which economic agents behave.