The issue of institutions has often been neglected by traditional neoclassical economics and, thus, by modernization theory. The two main reasons for this can be found in the simple assumptions so far incorporated in neoclassical theory, which make it difficult to explain Institutional non-maximizing behavior for one, and in the traditional focus of economists on resource allocation and not on institutional means of using the allocated resources for another. An attempt is made to describe the effects of institutions on the economic behavior of individuals in developing countries. This is da ne by using the transaction cost approach as an analyzing tool. Specific phenomenas of developing economies and their societies can, thus, be theoretically tackled and analyzed.
