This essay first specifies and describes the behavioral and information cost assumptions that underlie instrumental rationality and the consequent a-institutional world of neoclassical theory and contrasts these assumptions to those that underpin a theory of institutions and transaction costs. It then explores the characteristics of political markets, characterizing the costs of transacting in political markets and the role of ideology in shaping political choices. Finally, it explores the implications of a transaction cost framework for the performance of polities and economies over time.
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