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1
Institutional Economics and the Relation between
Institutions and Development Basilia Aguirre
Arnoldshain Seminar XI“Migration, Development, and Demographic Change:
Problems, Consequences and Solutions”June 25 – 28, 2013
University of Antwerp, Belgium
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Introduction
Objective
To discuss how far theory has
gone to explain the
relationship between
institutions and development
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Introduction
Presentation Plan
Critics to Institutional Economics
Alternative views on institutional economics
Basic features of modeling Institutional
Economics
Potential to deal with problems of development
4
Critics to IE
Empirical difficulties
Problems with
definitions
Theoretical perspective
Institutional Economics
5
Most of the authors that criticize
Institutional Economics agree that institutions are
important to understand development
Critics to IE
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Pande and Udry (2005)
Measures are flaw, scarce and urban
Voit (2013)
Definitions neglects important aspects of institutions
Chang (2011)
Theoretical attitudes x theories
Voluntarism or fatalism
Critics to IE
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Three basic questions:Is it possible to identify an institutional
theory?What is institutional economics?
What do the various institutional approaches have in common?
The importance of
institutions
The purpose of explaining institutional
change
Alternative views
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DiMaggio and Powel (1997)
Organization theory, Political Science,
Public Choice, history and sociology
Common skepticism about the place of
social processes’ atomistic
conception
Shared conviction on the importance
of institutional mechanisms
Alternative views
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Nevertheless there are authors
that see more convergence
than divergence
Alternative views
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Williamson (2000)
Alternative views
Years
102 to 103
10 to 102
1 to 10
Continous
Institutional environmentFormal rules of the game (polity,
judiciary, bureaucracy)
EmbeddednessInformal institutions,
customs, tradition
Level Purpose
GovernancePlay the game, esp. contracts
Resource allocation and employment
Incentives alignment
Get the marginal conditions right
Get the governance structure right
Get the institutional environment right
Often non calculative, spontaneous
Social Theory
Positive political economy
Transactions costs economy
Neo classical economy
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Hodgson (1998)
1. Emphasis on institutional and cultural factors
2. Analysis is openly interdisciplinary
3. No recourse to the model of the rational utility-maximizing agent
4. Mathematical and statistical techniques are recognized as the servants of economic theory
5. The analysis starts from stylized facts and theoretical conjectures concerning causal mechanisms
6. Extensive use is made of historical and comparative empirical material
Alternative views
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Richter (2001)
NES and NIE have a common object: social action.
Both deal with social structures or organizations
(“institutions”).
Where most of them still differ are their models of
man: various motives of human actions (including
rational choice) on the one side, individual
rationality (pure or bounded) on the other.
Alternative views
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Modeling institutions
North (2005)
“Human environment is a human construct
of rules, norms, conventions, and ways of
doing things that define the framework of
human interaction.” (pp. 11)
Scientists divided the environment in many
disciplines
“Our analytical frameworks must integrate
insights derived from these artificially
separated disciplines if we are to
understand the process of change.”
(pp.11)
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Ostron (2007)
“To model a human-interaction as a game, the theorist must decide
which components to use from a set of seven working parts of an
interaction as well as how the individuals who are interacting will be
modeled.” (pp. 7)
Modeling institutions
Modeling individuals
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Modeling individuals
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Modeling individuals
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Modeling individuals
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Attempts towards an conjoint theory
Besides the common characteristics pointed by Hodson (1998)
and Richter (2000) there are tree more:
Uncertainty
Conflict
Methodological individualism
Some of then are going toward the building of a unified
theory.
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Attempts towards an conjoint theory
Hodgson (2006)
“However, while rules are not in the DNA, it would be a
mistake to go to the other extreme and regard rule
following as something entirely deliberative.” (p.4)
“However, as Commons hinted and Veblen (1909, 628–30)
argued in more depth, behavioral habit and
institutional structure are mutually entwined and
mutually reinforcing: both aspects are relevant to
the full picture.” (p.8)
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Attempts towards an conjoint theory
Ostrom (2000)
Proposal:
Indirect evolutionary approach
Rigorous theoretical approach
Helps understanding how preferences, including those
associate to social norms, evolve and adapt
Learning by adapting
Through experience
Learn trust, fairness
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Attempts towards an conjoint theory
North (2005)
“In contrast to Darwinian evolutionary theory, the key to human evolutionary change is the intentionality of the players. The selection mechanism in Darwinian evolutionary theory are not informed by beliefs about the eventual consequences.” (p.viii)
“Part of the scaffolding humans erect is an evolutionary consequence of successful mutations and is therefore a part of genetic architecture of humans such innate cooperation within small interacting groups; part is a consequence of cultural evolution such as the development of institutions to favor larger group cooperation.” (p. ix)
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Attempts towards an conjoint theory
North (2005)
Scaffolds and beliefs
How do we acquire then?
“Much of learning comes from absorbing and adjusting to subtle
events that have an impact on our lives, incrementally
modifying our behavior ever so slightly. Implicit knowledge
evolves without ever being reasoned out.” (p.26)
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Institutions and development
Two main promising contributions to the understanding of relation between institutions and development.
Ostrom (2007)
North, Wallis and Weingast (2009)
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Institutions and developmentOstrom
Irrigation systems studies
Understanding the process of change in multiple specific setting
Method of displaying rule inventory and follow changes in that inventory over time.
Identification of the dynamics of rule change in the specific contexts
Interaction between formal and informal rules
Understanding of the choices people did along their history concerning the design of irrigation systems
25
Institutions and development
North, Wallis and Weingast
Social order:
Limited access order – LAO
Open access order – OAO
Transition
Impersonal transactions
Perpetual organization
Control of violence
Rule of law
26
Institutions and development
North, Wallis and Weingast
Change is a product of elites
intentional acts
Consistent with their interest
Not necessarily with their
intentions
The idea of inclusion and capabilities27
Institutions and development
Contributions
Development as a historical process
Integration between formal and
informal rules
Self-interest and rules
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Thank you!