Institutions

Good institutions

• Efficient (cost/externality minimizing, including social costs0 

• Reliable (rule-based, consistently applied) 

• Credible (consistent over long period of time) 

  • Both 

    • Maximize sources of growth

    • Minimize social costs 

• Three characteristics of good institutions: 

  • Enforcement of property rights/contractual obligation (allows investment, creates markets) 

  • Constraints on actions of elites 

    • Barrs elites from extracting social surplus 

  • Equal opportunities for broad segments of society 

    • Can be no inconsistency with how rules interface with various parts of society

JOURNAL ARTICLE

Institutions and Economic Theory

Douglass C. North

The American Economist

Vol. 36, No. 1 (Spring, 1992), pp. 3-6 (4 pages)

Published by: Sage Publications, Inc.

"Institutions are formed to reduce uncertainty in human exchange"

"Institutions are the rules of the game of a society or more formally are the humanly-devised constraints that structure human interaction."

Composed of:

• Formal rules (statute law, common law, regulations)

• Informal constraints (conventions, norms of behavior, and self-imposed rules of behavior)

• And the enforcement characteristics of both

Organizations as the "players' groups of individuals bound by a comon purpose to achieve objectives"

• political bodies (parties, senate, city council, regulatory agency)

• economic bodies (firms, trade unions, family farms, cooperatives)

• social bodies (churches, clubs, athletic associations)

• educational bodies (schools, colleges, vocational training centers)

FIVE PROPOSITIONS

1. The continuous interaction between institutions and organizations in the economic setting of scarcity and hence competition is the key to institutional change.

2. Competition forces organizations to continually invest in skills and knowledge to survive The kinds of skills and knowledge individuals and their organizations acquire will shape evolving perceptions about opportunities and hence choices that will incrementally alter institutions.

3. The institutional framework provides the incentives that dictate the kind of skills and knowledge perceived to have the maximum pay-off.

4. Perceptions are derived from the mental constructs of the players.

The economies of scope, complementarities, and network externalities of an institutional matrix make institutional change overwhelmingly incremental and path dependent.

https://sk.sagepub.com/ency/edvol/encyclopedia-of-management-theory/chpt/institutional-theory

Institutional theory - six key concepts

1. Infusion of value: institutionalization as process: "by which, over time, routine tasks, organizational structures, or functional positions acquire surplus meaning or value beyond their intended function."

   1. Philip Selznick: organizational activity has two realms - technical and rational realm of purposive action and symbolic and institutional realm of meaning and value

      1. organizations become infused with significance (i.e. value) that extends beyond bare functional utility

      2. through infusion of meaning and value, there are "UNINTENDED CONSEQUENCES to purposive action"

         
         

2. Diffusion: new practices adopted not because of technical outcomes but because resonate with social and community values

   
   

3. Rational Myths: beliefs that justify and explain certain practices even if lack empirical support

   
   

4. Loose Coupling: autonomy in operations

   
   

5. Legitimacy: how orgs gain acceptance through conforming with established norms and expectations

   
   

6. Isomorphism: tendency for orgs to become similar in structure and practices, driven by pressures to conform to institutional norms and expectations

   1.