Chapter 38 Institutions and economic development This chapter discusses two propositions: (1) institutions matter and (2) the determinants of institutions susceptible to the tools of economic analysis. Transaction costs include the direct costs of obtaining information negotiating among the parties to an agreement and communicating all relevant provisions to the parties as well as the indirect costs arising from the opportunistic behavior of economic entities in light of imperfect information and risks. The theory of collective action relates to the question of under what conditions is it advantageous for individual entities to participate in the collective action for development of new or modified institutions given the distribution of expected costs and benefits to the individual innovators and the possible externality and or free rider problems. Research on institutions and institutional change in a country may contribute not only to the development of economic theory in general but also to that of institutional reforms in that country.