Institutional Arrangements
Institutional or contractual arrangements describe the sets of rules and structures governing
the allocation and exchange of resources through specific transactions. It describes how a
given economic activity is arranged. Three broad categories of institutional arrangement in the
exchange process can be distinguished—follows:
a) Gift exchange,
b) Hierarchies,
c) Markets
There are many hybrid forms combining elements from each so that the distinctions among
these forms are often blurred.
If one put these three forms of institutional arrangements along a continuum, these three
forms can differ in many ways as described in the figure below.
Gift exchange Hierarchies Markets
Increasing emphasis on precision in the content of exchange
Increasing emphasis on the relationship between parties in exchange
Increasing interaction between different transactions involving the same parties
Increasing demands on the wider institutional environment
a) Gift exchange
Is based on shared values that stress shared responsibilities in social groups with deliberately
imprecise terms of mutual obligations that are heavily reliant on investment in social values
and social capital. Parties are involved not just in a single exchange but in many interrelated
and interacting economic and non-economic activities. These kinds of exchange institutions
are widely observed at early stage in the economic development. They are also observed in
collective and ‘closed’ society that are dominated by informal rules.
b) Hierarchies
Use organizational command and control to allocate resources. Hierarchies are the basis for
operations by governments, parastatal agencies, most NGOs, and anything other than the
smallest private firms.
c) Market transactions
Usually have more precise (in terms of quantity, quality, location, and time) terms of
exchange than do the other two forms of exchanges. Market transactions involve little (if
any) social interaction among parties.
Institutional or contractual arrangements describe the sets of rules and structures governing
the allocation and exchange of resources through specific transactions. It describes how a
given economic activity is arranged. Three broad categories of institutional arrangement in the
exchange process can be distinguished—follows:
a) Gift exchange,
b) Hierarchies,
c) Markets
There are many hybrid forms combining elements from each so that the distinctions among
these forms are often blurred.
If one put these three forms of institutional arrangements along a continuum, these three
forms can differ in many ways as described in the figure below.
Gift exchange Hierarchies Markets
Increasing emphasis on precision in the content of exchange
Increasing emphasis on the relationship between parties in exchange
Increasing interaction between different transactions involving the same parties
Increasing demands on the wider institutional environment
a) Gift exchange
Is based on shared values that stress shared responsibilities in social groups with deliberately
imprecise terms of mutual obligations that are heavily reliant on investment in social values
and social capital. Parties are involved not just in a single exchange but in many interrelated
and interacting economic and non-economic activities. These kinds of exchange institutions
are widely observed at early stage in the economic development. They are also observed in
collective and ‘closed’ society that are dominated by informal rules.
b) Hierarchies
Use organizational command and control to allocate resources. Hierarchies are the basis for
operations by governments, parastatal agencies, most NGOs, and anything other than the
smallest private firms.
c) Market transactions
Usually have more precise (in terms of quantity, quality, location, and time) terms of
exchange than do the other two forms of exchanges. Market transactions involve little (if
any) social interaction among parties.
