Economics of International Organizations

The essence of an international organization is the delegation of decision-making authority from individual states to the organization, representing the collectivity of member states. In simple terms, international organizations are to international law as firms are to contracts: states form international organizations in order to reduce the transaction costs associated with cooperation, as compared to the entry into international legal rules without organizations. The core questions are the same: why are these institutions formed, what powers do they have, and how are they exercised? This chapter analyzes the reasons for the creation of international organizations, as well as the reasons why particular structures of international organizations are utilized. It assesses the relationship among assignment of subject matter authority, legislative capacity, adjudicative capacity, enforcement capacity, and membership. It examines how these features correspond to particular contexts of international cooperation.