Resource allocation through the state or the market, or through both, has occupied major interest in economic theory and policy. Hence, the role of the state and the market, the former symbolised by various forms of intervention and the latter by neoclassical economics and pricing, has preoccupied analysts. Debates have raged over 'state failure' and lmarket failure' with the search for new theoretical approaches. In this context, New Institutional Economics (NIE) focuses on analysing the conduct of rational individuals under various forms of market failure. Basically, a social dilemma emerges when radical individualism becomes inconsistent with social welfare such that the choices made by rational individuals yield outcomes that are socially undesirable [i e, net Pareto optimality ] with market failures yielding social dilemmas. NIE professes that institutions provide the mechanisms to enable individuals to escape the tension between individual and social rationality created by the perverse incentives that produce the failure of markets. While NIE sets out to build on. modify and extend neoclassical theory, it functions firmly in the realm of scarcity and competition. An analysis of NIE for development demands a fuller understanding of the interaction between the state and development policies. This paper aims to highlight some of the key conceptual and empirical issues which impinge on NIE New Institutional Economics and Development RESOURCE allocation through the market or the suite, or through some combination of both, has been the focus of interest in economic theory and policy-making. Hence, the use of either the market, based on neoclassical economics, and underpinned by pricing, or the state, symbolised by government intervention, is of major importance in understanding the process of growth and development. However, both allocative mechanisms may deviate from their norms. Thus, the necessary and sufficient conditions for fulfilling 'pareto optimum' through the pricing mechanism may not be met because of imperfect markets, externalities, inability to supply particular goods and services, and information deficiencies. Similarly, state or government interventions may lead to allocative distortions with inefficiencies in production and consumption. Underpinning the role of the slate and/or the market is the access of different classes to state power which is the cornerstone of decision-making over policies.
