Economic instruments, or market based instruments try to bring market advantages to social dilemma situations, where private actions do not lead to socially optimal outcomes. Economic instruments try to redress such market failure. They try to create incentives for firms and individuals to act in the public interest. Such situations can be regarded as ‘social dilemma’. An alternative mechanism to solve social dilemma is to use cooperation amongst individuals, by facilitating and utilising social capital. The use of social capital is remains largely underexplored as a policy option, although this trend is changing, most notably in European rural development. Using evidence from research conducted on agricultural and rural institutions in central and Eastern Europe, where extreme institutional change was caused by political shocks to the system, it is argued that policy is best directed at stimulating institutional innovation, through social capital formation. There are lessons applicable to problems evident in rural New Zealand.