1. Joanna Tyrowicz What are institutions? Institutional Economics

2. 2 1. What is an “institution”? History – time? Sociology – collective? Political science – power? Economics – choice?

3. 3 New institutionalism by Goodin (1996) 1. Individual agents and groups pursue their respective projects in a collectively constrained context. organized patterns of socially constructed norms and roles, and socially prescribed behaviors expected of occupants of those roles created and re-created over time. 2. Although constraining, they are in various other respects advantageous to individuals and groups in the pursuit of their own more particular projects.

4. 4 New institutionalism by Goodin (1996) 4. Constraints typically have historical roots, as leftovers of past actions and choices. 5. Contextual factors: constrain and … shape desires, preferences, and motives of individuals and group agents 6. Constraints embody, preserve, and impart differential power resources with respect to different individuals and groups.

5. 5 What is an “institution” then? Arrangements that coordinate the behavior of individuals in society. Institutions are sets of regulatory norms. An institution is a stable, valued, recurring pattern of behavior.

6. 6 Where do we see “institutions”? 1. Is family an institution? 2. Friendship? 3. Love? 4. Marriage? 5. School? 6. Exam? 7. Market? 8. Firm? 9. Contract? 10. Polls (voting) 11. Political party? 12. Constitution? 13. Exchange rate regime? 14. Central bank independence? 15. Currency? 16. Theatre? 17. Literature? 18. Cinema? 19. Cinematography? 20. Poverty? 21. Social stratification? 22. Casta system in India?

7. 7 There has to be reciprocity The important conclusion Social agents generate, influence and support institutions. BUT Institutions create social agents. A good institution must survive a dual test of “making sense” and “being fit” for its mission.

8. 8 Institution vs. Organization by Offe (1996) 1. Organizational duties are dyadic (boss-worker), while institutional rules are triadic (established and enforced by third parties, which are not a part of the institutionalized interaction). 2. Duties are subordinate to the intended outcomes in organizations, but they are on the same level in institutions. 3. In organization duties are restricted to the space granted by institutions to agents in their domain to pursue their objective.

9. 9 Institution vs. Organization An institution is a commonly known framework of regulations, which allows us to analyze correctly the situation we are in, and to anticipate what can happen (Offe). Institutions are the laws, informal rules, and conventions that give a durable structure to social interactions among members of a population (Bowles). If we want to study a process which can be a result of institutional influence, then we model institution as a game. If we are interested in why an institution exists, or how it evolves, it is better to treat institution as an outcome of a game.

10. 10 Aspects of social interactions Cooperative Noncooperative Common interestConflict Rules of the road Property rights (modern) Contractual exchange Wage bargaining Property rights (pre-state) Evolution of norms Language evolution Labor discipline Repayment of loans Crop shares

11. 11 Do we actually play games? 1. Many problems in social sciences are in principle 2xn games (2 players, n strategies). 2. The concept of Nash equilibrium mutually best response (not necessarily best outcome!) 3. What would we do without the assumption of full rationality? 4. Necessary conditions: overlapping, asymmetric, constitutive, recursive. 5. Does society exhibit the characteristics of games?

12. 12 The evolution of property rights: Evolutionarily stable strategy - it is able to self correct, if it is subject to small perturbations. Hawk Dove Game: doves, when they meet, share the prize, hawks, when the meet, fight over the prize, => costs to both of them, when a hawk meets a dove, the hawk takes the prize. Evolutionary approach

13. 13 Hawk-dove game HawkDove Hawka=(v-c)/2b=v Dovec=0d=v/2 Row player’s payoffs

14. 14 Evolution game - example As long as c > v neither playing hawk nor dove is the evolutionarily stable strategy. In the opposite case the evolutionarily stable strategy is to play hawk. The Nash equilibrium of this game is where p* is the equilibrium fraction of hawks in the population. This equilibrium is not a desirable outcome: The average payoff is maximized when p=0, that is when there are no hawks at all. The equilibrium in this population is Pareto inferior to any p < p*. At p* neither hawks nor doves can increase fitness by switching type, while average fitness is maximized at p=0.

15. 15 Emergence and change of institutions I nstitution may fail to accomplish its purpose because of: 1. misdesign of the institution for that purpose, 2. failure of particular people within this institution. Who bears the responsibility?