Required readings:
Comparing theories of institutional change – Kingston and Caballero
Pages 151-180
2 categories of institutional change:
1. Theories in which institutions are purposefully designed and implemented in a
centralized way, either by a single individual or by many individuals or groups
interacting through some kind of collective choice or political process in which they
lobby, bargain, vote, or otherwise compete to try to implement institutional changes
which they perceive as beneficial to themselves, or to block those they view as
undesirable
2. Theories of evolutionary institutional change in which new institutional forms
periodically emerge and undergo some kind of decentralized selection process as
they compete against alternative institutions successful institutions (those that
survive the selection process) spread and the unsuccessful institutions die out
institutional change occurs spontaneously through the uncoordinated choices of
many agents
Institutions (North): the rules of the game in a society, the humanly devised constraints that
shape human interaction they reduce uncertainty by providing a structure to everyday life
they include formal rules (laws and institutions) and informal constraints (conventions
and norms) informal institutions: include codes of conduct, norms of behavior,
conventions, extensions, elaborations, and modifications of formal rules and are a part of
culture
Formal institutions: rules are made explicit or written down or enforced by the state, or
rules are enforced by actors with specialized roles
Informal institutions: rules are implicit, or rules are enforced endogenously by the members
of the relevant group
Collective-choice theories of institutional change:
Libecap: different configurations of property rights entail different distributional
consequences individuals and groups engage in bargaining, lobbying, and political
action to try to alter the rules for their own benefit contracting: higher-level rules,
activities and perceptions of actors shape the direction of institutional change of the
lower-level rules whether an exogenous parameter shift will lead to a change in
the property-rights rules depends on the distribution of benefits under the existing
and proposed new systems, and on whether groups who expect to be losers from a
change are able to block it under the rules that frame the political (rule-making)
contest he sees institutional change as a path-dependent process existing
institutions create groups with an interest in preserving the status quo, which can
impede institutional change and enable inefficient institutions to persist, and
institutional change is usually incremental since it is often easier to achieve
consensus on small adjustments than to effect major changes to existing rules
, Ostrom: distinguishes between operational rules (rules that govern day-to-day
interactions), collective-choice rules (rules for choosing operational rules), and
constitutional rules (rules for choosing collective-choice rules), and there may also be
meta constitutional rules (rules for choosing constitutional rules) institutional
change happens because each individual calculates their expected costs and benefits
from an institutional change and if there is a minimum coalition (necessary to effect
change agrees to it; determined by the higher-level rules), an institutional change can
occur whether an institutional change occurs ultimately depends on higher-level
rules and on how decision makers perceive the likely effects of a change in rules
she recognizes exogenous and endogenous causes of institutional change argues
that if the beneficiaries of institutional change cannot commit to compensate the
losers, powerful groups may be able to block beneficial change or impose inefficient
change bounded rationality: some or all of the players may hold incorrect beliefs
about the likely effects of a proposed institutional change players may experiment
with institutional innovations and attempt to imitate successful institutions observed
elsewhere (because they recognize their own bounded rationality)
Alston: institutional change results from the bargaining actions of demanders
(constituents) and suppliers (government)
Kantor: groups of constituents lobby politicians to change formal rules, and the
politicians have incentives to be responsive to their constituents’ demands
politicians also have their own objectives and face other political and constitutional
constraints
Commons: argued that if existing rules became a limiting factor (unsuitable) then
individuals or groups would attempt to change them through the courts or by
legislation artificial selection: courts play a key role in determining the direction of
institutional change
North: formal rules are designed by a predatory ruler whose objective is to maximize
tax revenue rather than economic output or growth interests and objectives of the
ruler’s subjects are of secondary importance
Theories which view institutional change as the outcome of a deliberate, collective-choice
process of rule-creation have difficulty explaining why formal rules are ignored, or fail to
produce their intended outcome collective-choice approach is ill-equipped to deal with
some kinds of informal rules
Informal rules:
1. Rules are not written down, or are not enforced by the state
2. Ethical codes or moral norms which are internalized and directly reflected in players’
preferences can impact institutional change by affecting the process of choosing
among formal rules
3. Rules that are not deliberately designed, but are nevertheless followed because
deviating from the rule is not individually rational if others follow it even though
people may see them as moral, ideological or cultural rather than strategic, if
everyone else follows these rules, even rational players will follow them to get the
best outcome this category of informal rules do sometimes change over time, but
they generally evolve in a decentralized, spontaneous matter
,Evolutionary processes: processes which satisfy the Darwinian evolutionary principles of
variation (a source of mutations), selection (survival of successful traits), and inheritance (a
process by which the successful traits are replicated)
In the evolutionary theories, there is no central mechanism which causes a coordinated shift
in the rules perceived by all the players, or in their behavior or beliefs new rules or
behaviors undergo some kind of decentralized selection process, because of which some
institutions spread through the population, while other institutions die out new rules and
the associated patterns of behavior emerge from the uncoordinated choices of many
individuals rather than a single, collective-choice or political process
Evolutionary theories of institutional change:
Transactions cost economics (Williamson): argues that in many interactions
transaction costs arise because of the bounded rationality and opportunism of the
transacting parties discriminating alignment hypothesis: most efficient
institutional forms (those which minimize transaction costs) will emerge; institutions
will achieve an optimal match with a particular transaction empirical success story
approach is limited to situations in which competition among institutional forms can
operate to weed out inefficient rules
Alchian: the process of institutional change envisaged is an evolutionary one in which
competitive pressure weeds out inefficient forms of organizations because those who
choose efficient institutions will realize positive profits and will therefore survive and
be imitated
Veblen: with evolution of habits of thought, habits are viewed as durable but
adaptable propensities to think and act in particular ways the value of habits is a
consequence of bounded rationality: they enable the individual to economize on
cognitive capacity and interpret information in a complex environment institutions
are habits of thought with respect to particular relations and particular functions of
the individual and of the community the evolution of social structure is a process
of natural selection of institutions (a process of natural selection of the fittest habits
of thought) institutional change involves the simultaneous co-evolution of shared
prevalent habits of thought (institutions) and the habits of individuals current
habits of thought are received from the past, affected by the present, and together
they affect the future path of institutional change changes in population and
technology drive institutional change by ensuring that current institutions and habits
of thought (inherited from the past) are never ideally suited to the requirements of
the present institutions and habits are continually evolving but can never catch up
with the progressively changing situation
Organizational routines: involve the coordination of habits among a group of people
such that an orchestrated sequence of actions emerges firms may search for new
routines if existing routines are unsatisfactory, and they may attempt to copy
successful routines from other firms constant source of new variation on the
original routines evolutionary selection occurs due to the pressure of market
competition, as successful firms expand and their routines are copied, whereas
unsuccessful firms fail
Hayek: rules of conduct have evolved because the groups who practiced them were
more successful and displaced others thinking and acting are governed by rules
, which have by process of selection been evolved in the society in which he lives, and
which are the product of the experience of generations these rules and
organizations are forming part of a spontaneous order law of liberty: through
group selection, this configuration of rules will evolve towards an optimal
configuration based on consistent general principles Hayek sees shared
expectations (rather than rules) as the fundamental source of order in society
argues that mind is the product of the social environment in which it has grown up;
something that has acted upon and altered institutions people acquire those
habits and practices that increase the chances of persistence of the group in which
they live distinction of mind and rules fades: the mind does not so much make
rules as consists of rules of action every man growing up in a given culture will find
in himself rules which are part of a cultural heritage which is likely to be constant
Hayek argues that intentional human intervention in the design of institutions should
aim to discover and uphold those ideal rules which would evolve spontaneously,
rather than to invent better rules; rules should be designed so as to mimic the
outcomes of an evolutionary process
Young: argues that historical accidents could lead to the selection of conventions,
and that in the long run, the pattern of institutional change will follow a punctuated
equilibrium process in which rapid switches between conventions are interspersed
with long periods of stability
Sugden: argues that in new situations, people wishing to coordinate their strategies
will generally adopt rules which are analogous to rules with which they are already
familiar he argues that property rights rules can emerge spontaneously (but these
are not necessarily efficient)
Knight: argues that different sets of rules often have different distributional
consequences, so different actors may favor the emergence of different rules in a
new situation, before the rules which will govern some interaction have become
firmly established, people will bargain over which rule to adopt in their individual
interactions this is a decentralized process: the bargaining takes place at the level
of individual transactions over time a common convention may emerge if some
kinds of actors have greater bargaining power than others, this may systematically
affect the kind of rule that ultimately becomes widely used by the society overall
Levi: formal rules can give power to certain groups and disadvantaged groups may try
to force institutional change by withdrawing their consent from existing institutional
arrangements Bowles and Naidu: if a sufficient number of players from one group
refuse to accept the status quo contract, this can induce members of the other group
to lower their contractual demands, leading to institutional change institutional
change will follow a punctuated equilibrium process of periods of stability
interspersed with rapid changes
Ayres: technological development forces change upon the institutional structure by
changing the material setting in which it operates institutions are resistant to
change, partly due to people’s emotional attachment to existing institutions, and
partly because change threatens existing patterns of status, wealth, and power
there is a perpetual opposition between the force of technology continually making
for change and the force of institutions opposing change Hodgson: society’s
historical development involves a mechanical passage through predictable stages as
changes in technology (modes of production) give rise to changes in institutions
Comparing theories of institutional change – Kingston and Caballero
Pages 151-180
2 categories of institutional change:
1. Theories in which institutions are purposefully designed and implemented in a
centralized way, either by a single individual or by many individuals or groups
interacting through some kind of collective choice or political process in which they
lobby, bargain, vote, or otherwise compete to try to implement institutional changes
which they perceive as beneficial to themselves, or to block those they view as
undesirable
2. Theories of evolutionary institutional change in which new institutional forms
periodically emerge and undergo some kind of decentralized selection process as
they compete against alternative institutions successful institutions (those that
survive the selection process) spread and the unsuccessful institutions die out
institutional change occurs spontaneously through the uncoordinated choices of
many agents
Institutions (North): the rules of the game in a society, the humanly devised constraints that
shape human interaction they reduce uncertainty by providing a structure to everyday life
they include formal rules (laws and institutions) and informal constraints (conventions
and norms) informal institutions: include codes of conduct, norms of behavior,
conventions, extensions, elaborations, and modifications of formal rules and are a part of
culture
Formal institutions: rules are made explicit or written down or enforced by the state, or
rules are enforced by actors with specialized roles
Informal institutions: rules are implicit, or rules are enforced endogenously by the members
of the relevant group
Collective-choice theories of institutional change:
Libecap: different configurations of property rights entail different distributional
consequences individuals and groups engage in bargaining, lobbying, and political
action to try to alter the rules for their own benefit contracting: higher-level rules,
activities and perceptions of actors shape the direction of institutional change of the
lower-level rules whether an exogenous parameter shift will lead to a change in
the property-rights rules depends on the distribution of benefits under the existing
and proposed new systems, and on whether groups who expect to be losers from a
change are able to block it under the rules that frame the political (rule-making)
contest he sees institutional change as a path-dependent process existing
institutions create groups with an interest in preserving the status quo, which can
impede institutional change and enable inefficient institutions to persist, and
institutional change is usually incremental since it is often easier to achieve
consensus on small adjustments than to effect major changes to existing rules
, Ostrom: distinguishes between operational rules (rules that govern day-to-day
interactions), collective-choice rules (rules for choosing operational rules), and
constitutional rules (rules for choosing collective-choice rules), and there may also be
meta constitutional rules (rules for choosing constitutional rules) institutional
change happens because each individual calculates their expected costs and benefits
from an institutional change and if there is a minimum coalition (necessary to effect
change agrees to it; determined by the higher-level rules), an institutional change can
occur whether an institutional change occurs ultimately depends on higher-level
rules and on how decision makers perceive the likely effects of a change in rules
she recognizes exogenous and endogenous causes of institutional change argues
that if the beneficiaries of institutional change cannot commit to compensate the
losers, powerful groups may be able to block beneficial change or impose inefficient
change bounded rationality: some or all of the players may hold incorrect beliefs
about the likely effects of a proposed institutional change players may experiment
with institutional innovations and attempt to imitate successful institutions observed
elsewhere (because they recognize their own bounded rationality)
Alston: institutional change results from the bargaining actions of demanders
(constituents) and suppliers (government)
Kantor: groups of constituents lobby politicians to change formal rules, and the
politicians have incentives to be responsive to their constituents’ demands
politicians also have their own objectives and face other political and constitutional
constraints
Commons: argued that if existing rules became a limiting factor (unsuitable) then
individuals or groups would attempt to change them through the courts or by
legislation artificial selection: courts play a key role in determining the direction of
institutional change
North: formal rules are designed by a predatory ruler whose objective is to maximize
tax revenue rather than economic output or growth interests and objectives of the
ruler’s subjects are of secondary importance
Theories which view institutional change as the outcome of a deliberate, collective-choice
process of rule-creation have difficulty explaining why formal rules are ignored, or fail to
produce their intended outcome collective-choice approach is ill-equipped to deal with
some kinds of informal rules
Informal rules:
1. Rules are not written down, or are not enforced by the state
2. Ethical codes or moral norms which are internalized and directly reflected in players’
preferences can impact institutional change by affecting the process of choosing
among formal rules
3. Rules that are not deliberately designed, but are nevertheless followed because
deviating from the rule is not individually rational if others follow it even though
people may see them as moral, ideological or cultural rather than strategic, if
everyone else follows these rules, even rational players will follow them to get the
best outcome this category of informal rules do sometimes change over time, but
they generally evolve in a decentralized, spontaneous matter
,Evolutionary processes: processes which satisfy the Darwinian evolutionary principles of
variation (a source of mutations), selection (survival of successful traits), and inheritance (a
process by which the successful traits are replicated)
In the evolutionary theories, there is no central mechanism which causes a coordinated shift
in the rules perceived by all the players, or in their behavior or beliefs new rules or
behaviors undergo some kind of decentralized selection process, because of which some
institutions spread through the population, while other institutions die out new rules and
the associated patterns of behavior emerge from the uncoordinated choices of many
individuals rather than a single, collective-choice or political process
Evolutionary theories of institutional change:
Transactions cost economics (Williamson): argues that in many interactions
transaction costs arise because of the bounded rationality and opportunism of the
transacting parties discriminating alignment hypothesis: most efficient
institutional forms (those which minimize transaction costs) will emerge; institutions
will achieve an optimal match with a particular transaction empirical success story
approach is limited to situations in which competition among institutional forms can
operate to weed out inefficient rules
Alchian: the process of institutional change envisaged is an evolutionary one in which
competitive pressure weeds out inefficient forms of organizations because those who
choose efficient institutions will realize positive profits and will therefore survive and
be imitated
Veblen: with evolution of habits of thought, habits are viewed as durable but
adaptable propensities to think and act in particular ways the value of habits is a
consequence of bounded rationality: they enable the individual to economize on
cognitive capacity and interpret information in a complex environment institutions
are habits of thought with respect to particular relations and particular functions of
the individual and of the community the evolution of social structure is a process
of natural selection of institutions (a process of natural selection of the fittest habits
of thought) institutional change involves the simultaneous co-evolution of shared
prevalent habits of thought (institutions) and the habits of individuals current
habits of thought are received from the past, affected by the present, and together
they affect the future path of institutional change changes in population and
technology drive institutional change by ensuring that current institutions and habits
of thought (inherited from the past) are never ideally suited to the requirements of
the present institutions and habits are continually evolving but can never catch up
with the progressively changing situation
Organizational routines: involve the coordination of habits among a group of people
such that an orchestrated sequence of actions emerges firms may search for new
routines if existing routines are unsatisfactory, and they may attempt to copy
successful routines from other firms constant source of new variation on the
original routines evolutionary selection occurs due to the pressure of market
competition, as successful firms expand and their routines are copied, whereas
unsuccessful firms fail
Hayek: rules of conduct have evolved because the groups who practiced them were
more successful and displaced others thinking and acting are governed by rules
, which have by process of selection been evolved in the society in which he lives, and
which are the product of the experience of generations these rules and
organizations are forming part of a spontaneous order law of liberty: through
group selection, this configuration of rules will evolve towards an optimal
configuration based on consistent general principles Hayek sees shared
expectations (rather than rules) as the fundamental source of order in society
argues that mind is the product of the social environment in which it has grown up;
something that has acted upon and altered institutions people acquire those
habits and practices that increase the chances of persistence of the group in which
they live distinction of mind and rules fades: the mind does not so much make
rules as consists of rules of action every man growing up in a given culture will find
in himself rules which are part of a cultural heritage which is likely to be constant
Hayek argues that intentional human intervention in the design of institutions should
aim to discover and uphold those ideal rules which would evolve spontaneously,
rather than to invent better rules; rules should be designed so as to mimic the
outcomes of an evolutionary process
Young: argues that historical accidents could lead to the selection of conventions,
and that in the long run, the pattern of institutional change will follow a punctuated
equilibrium process in which rapid switches between conventions are interspersed
with long periods of stability
Sugden: argues that in new situations, people wishing to coordinate their strategies
will generally adopt rules which are analogous to rules with which they are already
familiar he argues that property rights rules can emerge spontaneously (but these
are not necessarily efficient)
Knight: argues that different sets of rules often have different distributional
consequences, so different actors may favor the emergence of different rules in a
new situation, before the rules which will govern some interaction have become
firmly established, people will bargain over which rule to adopt in their individual
interactions this is a decentralized process: the bargaining takes place at the level
of individual transactions over time a common convention may emerge if some
kinds of actors have greater bargaining power than others, this may systematically
affect the kind of rule that ultimately becomes widely used by the society overall
Levi: formal rules can give power to certain groups and disadvantaged groups may try
to force institutional change by withdrawing their consent from existing institutional
arrangements Bowles and Naidu: if a sufficient number of players from one group
refuse to accept the status quo contract, this can induce members of the other group
to lower their contractual demands, leading to institutional change institutional
change will follow a punctuated equilibrium process of periods of stability
interspersed with rapid changes
Ayres: technological development forces change upon the institutional structure by
changing the material setting in which it operates institutions are resistant to
change, partly due to people’s emotional attachment to existing institutions, and
partly because change threatens existing patterns of status, wealth, and power
there is a perpetual opposition between the force of technology continually making
for change and the force of institutions opposing change Hodgson: society’s
historical development involves a mechanical passage through predictable stages as
changes in technology (modes of production) give rise to changes in institutions
