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What are institutions and what do they do?

Institutions are defined as the humanly-devised constraints to structure human behaviour (North, 1990).

There are two types of institutions - formal and informal. Formal institutions include laws, regulations and political rules, such as tax law, speed limits and NGO membership rules, whereas informal institutions include social norms, culture and ethics.

So, what exactly do institutions do? Their key role is to reduce uncertainty by setting up the ‘rules of the game’ to constrain the range of socially and legally acceptable behaviour.

Your task

Search online and find research articles that relate to the questions:

  • What are the formal institutional differences between developed economies and emerging economies?

  • How can formal institutions reduce potential investment risks?

Share the links to the articles you found online in the discussion area and explain your reasons for your choices.


North, D. (1990). Institutions and Their Consequences for Economic Performance’. The Limits of Rationality, 383-401. University of Chicago Press

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This article is from the free online course:

Macro Environmental Analysis and Business Strategy: An Introduction

Coventry University