Scholars in economics, political science, and sociology use various definitions of the term institution. Sections 2.1 and 2.2 of this chapter define the term in a precise manner in order to delineate the scope of the analysis. Particular rules, beliefs, norms, and organizations are central to this definition, which helps illuminate why institutions have such a profound impact on behavior and how they should be studied analytically (Part II), why they persist in a changing environment and why they exert an independent impact on institutional dynamics (Part III), and how to study them empirically (Part IV).

The definition presented here encompasses other seemingly alternative definitions. It fosters the development of a unifying concept of the object of study and the integration of insights and analytical frameworks developed in conjunction with various definitions of institutions (section 2.3). The definition also highlights the sense in which transactions are the basic unit of institutional analysis, although this requires defining transactions in a more comprehensive manner than traditionally done in economics. Intertransactional linkages are central to institutions because, among other reasons, the institutionalized beliefs and norms that motivate behavior in a particular transaction reflect what other transactions were linked to it and in what way, while organizations are reflections of and means for linking transactions (sections 2.4 and 2.5).

While reading this chapter it is useful to keep in mind what it is not about. It does not examine the origin of institutions or why and how they change.