Institutional Design (Recent Economic Thought)

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Institutionalist Economics

Article Navigation. Close mobile search navigation Article Navigation. Volume Institutional change in cities and regions: a path dependency approach Emil Evenhuis. Oxford Academic. Google Scholar. Cite Citation. Permissions Icon Permissions. Abstract This article aims to make significant advances in the development of a path dependency approach to understanding institutional change at the subnational level in the context of economic development. Issue Section:. You do not currently have access to this article. Download all figures. Sign in. You could not be signed in.

Sign In Forgot password? Don't have an account? Sign in via your Institution Sign in. Purchase Subscription prices and ordering Short-term Access To purchase short term access, please sign in to your Oxford Academic account above. This article is also available for rental through DeepDyve. View Metrics. Email alerts New issue alert. This explains why public regulators may be called upon to reinforce the power of self-regulators. The public ruler can agree to use its power to make compliance with self-regulation mandatory.

This allows it to gain influence over the private regulator, which may then recognize the supremacy of the former in matters of governance, and may comply with principles imposed by the public order. In turn, the public regulator benefits from the expertise and the potential lower regulatory costs of private regulators. The main lessons to be learnt from the overall literature are twofold: whereas the effectiveness of self-regulation is limited by the extent of the market, the extent of the market and the efficiency of self-regulation is limited by the effectiveness of public regulation.

What does determine this effectiveness, then? Government thus turns out to be an organization that reduces — in return for a revenue or tax — the uncertainty underlying market exchanges, by providing protection and justice through a system of basic ground rules, laws and social customs.

However, this is not without a cost. Public ordering is itself subject to distortions, delays and to the influence of organized groups of pressure North, ; Along this line, the economic literature has deeply recurred to the historical analysis of institutions. The evidence suggests to them that government agents often enjoy considerable autonomy in regulating civil society, and that readily manipulable currents in public opinion are also important.

This claim partially reconciles the analysis of institutions with the modern interest group theory of regulation, developed by George Stigler and Gary Becker While the interest group theory explores the circumstances under which groups are more likely to organize and, in turn, influence public policy to serve their own narrow ends, the institutional analysis couples this approach with the investigation of the institutional and legal rules which inhibit or reinforce interest groups.

Again, we are in a second best world. The condition in which it occurs is analyzed in great detail in recent contributions, especially by North et al. Lessons of these types of analysis in terms of the organization of markets are twofold. What is efficient in a given national context might be outperformed by better arrangements in others. Second, the role of the public regulator can be to organize an information competition among market stakeholders and amongst private regulators to oversight the many and complex private bilateral and collective governance arrangements that shape the performance of exchanges.

As pointed out by Spiller and Liao , and by Brousseau and Glachant , this is, indeed, the right way to fix the information gap faced by any public regulator dealing with any private one that may use its regulatory and contractual capabilities to hinder competition. To a large extent, this can be summed up as the analysis of the tradeoffs between the centralization and the horizontal and vertical decentralization of governance.

Indeed, constitutional economics is mainly devoted to outlining the pervasive trade-offs associated to each form of limitation of powers, both in terms of horizontal legislature, executive, judiciary and vertical federal structure division of power Voigt, , Fiscal federalism is about the optimal level of decentralization of public good provision see Tiebout, ; Oates, , and ; Weingast, The issue is, indeed, to draw lessons to design governance systems ensuring more efficient outcomes.

In the following pages, we will focus on two main types of trade-offs that are relevant for our purpose. One of the outcomes of this is an adequate vertical and horizontal division of power to create checks and balances aimed at avoiding regulatory capture. This is the reason why competition and regulation policies are generally delegated to independent agencies and the surrounding rules interpreted as constitutional enactments, whose modification requires strong majorities. The definition of the appropriate level at which a given governance issue should be tackled depends on a number of dimensions in function of which the relative performance of centralization and decentralization may be measured Brousseau and Raynaud, On the one hand, decentralization brings benefits in terms of adaptation and compliance, while on the other, centralization enlarges the scope of markets hence, a deeper division of labor and a higher level of competition , and yields economies of scale in governance In addition, a federalist organization induces a de facto yardstick competition among governance units in public goods provision Tiebout, , which provides firms and citizens with the means to voice.

The main organizational cost of federalism is, however, the increasing costs of coordination among the federalist units. Cooter, and Inman and Rubinfeld, , for instance, discuss processes to deal with this tradeoff, which was not really addressed in the traditional federalist literature while it was recognized; e.

Tiebout, ; Oates, This responds not only to a subsidiarity principle, but also to the purpose of avoiding regulatory capture and to promote some degree of regulatory competition among the institutions devoted to competition policy. With respect to the US, the European organization of competition has evolved with the following features Manganelli, Nicita, Rossi, : a high degree of centralization of law-making, which does not exclude the existence of national laws that can be applied in specific circumstances; a high degree of decentralization of enforcement, mitigated by a strong unifying role played by the European Commission; the adoption of formal rules of coordination meant to smooth the vertical relationships among actors placed at different levels in the system particularly the Commission and NCAs ; a very limited role for formal rules of coordination in the context of horizontal relationships among NCAs and among NCAs and national regulatory authorities; the complementarity between public and private enforcement.

This is due to two joint circumstances. State regulation always entails a public enforcement structure based on formal rules. The superiority of self-regulation over state regulation is generally linked to the same self-enforcing conditions small communities, repeated interaction, shared information that characterize the emergence and effectiveness of informal rules. Yet, beliefs, ideology, etc. We focus here on different characterization of formal vs. Whether they are imposed by force or agreed upon, formal rules are linked to the implementation of explicit enforcement mechanisms to guarantee compliance.

This is the vision which has been proposed, among others, by Aoki and Greif Such a contrast among the nature of orders yields specific contrasts in terms of the analysis of their impact and of the processes of evolution. While the literature has originally contrasted formal and informal rules as alternative enforcement devices, recent contributions tend to stress the complementary relationship between the two kinds of institutions, emphasizing the hidden role of informal institutions to explain different evolutionary paths among alternative societies governed by comparable systems of formal rules Djankov et al.

Even if never consciously designed Sugden, they are, nonetheless, applied by community members. Informal norms have the property of being self-enforcing devices applied with very low transaction costs, because they are embedded in social behavior and transferred from one member to another through a mix of cultural heritage, shared values and organized consent The social nature of extra-legal enforcement devices somehow increases the probability of being sanctioned when violating the rules because it is the social network itself that acts both as a way of transmitting information and of enforcing sanctions Thus, in some cases social enforcement through informal rules reduces transaction costs as monitoring and detection and increases the probability of being sanctioned Thus, informal rules emerging to solve a problem of coordination may persist over time as equilibria even if the social cost of endogenous enforcement becomes higher than the social benefit of maintaining them.

This is due to switching costs for each individual, and to the fact that a general agreement among all individuals complying with a norm to switch at the same time to a new equilibrium is difficult to realize. As Bowles and Naidu outlined, informal rules maintain, with respect to formal ones, a sort of asymmetric time span: a much longer time is needed to create informal rules with respect to that required to destroy or to change the rules when established The pace of evolution is then characterized by infrequent, but brutal changes see Brousseau, Garrouste, Raynaud, Formal rules and public orderings act as default options in ex post bargaining among litigants.

When there is a risk of a wrong decision by a third party due to lack of information, parties prefer to avoid going to Court, and rely on private ordering solution. In a context in which the relative efficiency of alternative formal institutions is context dependent, it is complex to analyze institutional performance, and to decide what reforms should be undertaken.

This leads to the critiques often being addressed to international organizations such as the World Bank, which attempts to implement formal institutions, because they have proven efficient in other societal contexts. Institutions are complex in nature and the design of institutions should take into account such complexity when attempting to enhance economic performance. They enable scholars and decision-makers to clarify a number of debates that have to be dealt with when trying to enhance market performance in an economy.

Mechanisms of Democracy: Institutional Design Writ Small - Oxford Scholarship

This calls for the development of more systematic analyses of complementarities among institutional components. Moreover, individual agents develop initiatives to compensate for the loopholes in institutional frameworks. It is difficult to anticipate them and to control their consequences. The conditions for institutional change and the diversity of institutional evolutions should therefore be investigated more deeply in order to understand the conditions needed for the wished-for evolution to occur, and to learn how to manage reforms. Aghion P.

Amato G. Anderson T. Aoki M. Arrunada B. Brousseau and J. Glachant eds , New Institutional Economics. A Guidebook , Cambridge University Press. Ayres I. Chicago: University of Chicago Press. Baker G. Gibbons and K.

Edited by Tanja A. Börzel and Thomas Risse

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