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Institutions: Rules or Equilibria?

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Political Economy of Institutions, Democracy and Voting

Abstract

Recent scholarship has demonstrated the power of the rational choice framework for advancing our understanding of institutions and institutional change. Stimulated by these developments, the conceptual frameworks employed by scholars studying institutions have also been evolving, as old frameworks have been adapted and new frameworks have emerged to explore how institutions function, how they change, and how they affect economic behavior and outcomes. This involves two key questions: first, how institutions are selected and second, how people are motivated to follow institutionalized patterns of behavior. One strand of thought within the rational-choice approach to institutional analysis, the ‘institutions-as-rules’ approach, focuses on a theory of how the “rules of the game” in a society are selected. An emerging alternative approach instead emphasizes the importance of a theory of motivation and thereby endogenizes the “enforcement of the rules”, by studying ‘institutions-as-equilibria’. In this chapter, the authors survey these developments and highlight promising directions for future research. They argue that by endogenizing the issue of enforcement, the institutions-as-equilibria approach enables a more satisfactory treatment of several key issues, including promoting our understanding of processes of institutional change.

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Notes

  1. 1.

    For example, La Porta et al. (2008), Keefer and Knack (1997), Easterly and Levine (2003).

  2. 2.

    For example, Milgrom et al. (1990), North (1990), Greif (1989, 1994, 2006).

  3. 3.

    For example, Roland (2000), Aoki (2001), Qian (2003).

  4. 4.

    For a recent discussion, see Greif (2006). Kingston and Caballero (2009) survey theories of institutional change.

  5. 5.

    North (1990, p. 47) envisages a similar hierarchy with four levels of formal rules: constitutions, statute and common laws, specific bylaws, and individual contracts.

  6. 6.

    Williamson refers to this as the “discriminating alignment” hypothesis. Thus, for Williamson, “The overall object of the exercise essentially comes down to this: for each abstract description of a transaction, identify the most economical governance structure” (Williamson 1979, p. 234).

  7. 7.

    Nelson and Winter (1982) built an evolutionary theory of the firm based on the evolution of routines – sequences of action which coordinate the activities of many individuals – rather than rules. Routines evolve as successful firms expand and their routines are imitated – perhaps imperfectly – by others, creating a tendency towards the adoption of efficient routines (although possibly with considerable inertia).

  8. 8.

    “Although the “social” arrangements used to enforce decisions by collective-action mechanisms seem to be of utmost importance, there is little that I, as an economist, can say about most of them. I simply assume that such arrangements exist and are put into use” (Barzel 2002, p.119).

  9. 9.

    See, however, Hadfield (2008), who casts doubt on the importance of the civil-law/common-law distinction, and provides a richer and more refined alternative set of key parameters for the classification of legal regimes.

  10. 10.

    This idea builds on the ‘conventions’ literature (e.g., Sugden 1989). See also Schotter (1981), Calvert (1995), Aoki (2001), Dixit (2004), Kingston and Caballero (2009) and Greif (1994, 1998).

  11. 11.

    A regularity of social behavior does not imply uniformity of behavior as it is a characteristic of aggregates of individuals and not of each individual. Furthermore, social behavior is usually conditional on social roles and does not necessarily imply the same behavior by individuals with the same role. The behavioral regularity of ‘males propose to a female and only when they can support a family,’ for example, captures gender roles and implies that some males will never marry and the ages of those who do, will vary. Similarly, regularity of behavior is not necessarily frequent behavior. The process of impeaching a US president is regularized although rarely employed.

  12. 12.

    Of course, real-world processes of state-building do not start from the “clean slate” envisioned by Hobbes. Bates (2001) argues that historically, monarchical states emerged out of competition among feudal lineages as rural, agrarian societies based on kinship networks became increasingly urbanized and industrial. Olson (1993) provides an alternative parable for the origins of the state, arguing that the state emerged as those with the greatest capacity for violence found it privately more profitable to use this capacity to provide order in exchange for tax revenue, rather than simply to live by plunder.

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Authors and Affiliations

  1. Department of Economics, Stanford University, Stanford, CA, 94305, USA

    Avner Greif

  2. Department of Economics, Amherst College, Amherst, MA, 01002, USA

    Christopher Kingston

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  1. Avner Greif
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Correspondence to Avner Greif .

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Editors and Affiliations

  1. Center in Political Economy, Washington University in St.-Louis, Brookings Drive 1, Saint Louis, 63130, Missouri, USA

    Norman Schofield

  2. , Faculty of Economics, University of Vigo, Lagoas Marcosende, Vigo, 36310, Spain

    Gonzalo Caballero

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Greif, A., Kingston, C. (2011). Institutions: Rules or Equilibria?. In: Schofield, N., Caballero, G. (eds) Political Economy of Institutions, Democracy and Voting. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-19519-8_2

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