Informal Institutions, Formally
That’s the title of a paper I’ve finished a first draft of, which I’ll be presenting at the NYU market process colloquium in two weeks. The paper draws heavily on Madmen.
I’ll post a complete draft after incorporating comments from NYU, and will post as an addendum here. For now, here is the abstract and introduction.
Informal Institutions, Formally
Edward J. Lopez
Professor of Economics
Western Carolina University
Abstract: Informalinstitutions are important to numerous areas of political economy research, but scattered usages of the term create ambiguity in assessing the role of informal institutions as a whole. This paper presents a general model of informal institutions and their interaction with formal institutions. The model is used to address problems in political economy research associated with definition (what is a formal versus informal institution?), codification (how does an informal institution become a formal institution?), and integration (how aligned are formal and informal institutions?).
Institutions are the humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights). North (1991, p.97)
This paper presents a model of informal institutions and their interaction with formal institutions in political economy settings. In the political economy literature, scholars rely on institutions as a central construct. Institutions are the building blocks of modeling decision environments for agent choices, both individually as in the marketplace and collectively as in politics. A common approach is to treat an observed outcome (e.g., trade, growth, inequality, corruption) as a function of the structure of incentives that shape the chain of decisions leading to the observed outcome. The structure of incentives is in turn defined by prevailing institutional arrangements, yielding a general proposition for analyzing society through time: as institutional rules evolve to increase (decrease) the net costs to agents of engaging in behavior Q, we can expect to see a decrease (increase) in the observed quantity of Q. Some studies, in the manner of the epigraph by Douglass North above, make frequent use of formal institutions as distinguished from informal institutions, or from culture, or ethics, or customs, norms, taboos, or conventions, to name a few. While these usages perform substantial heavy lifting in their respective studies, the literature as a whole shows that these usages are varied and disparate, not always consistent, and sometimes contradictory to each other (Kingston and Caballero 2009). In a 2015 symposium on the nature and definition of institutions, Hodgson (2015:) observes:
The ambiguous terminology of ‘formal’ versus ‘informal’ institutions is often deployed but much less often defined. Sometimes ‘formal’ is intended to mean codified. Others use it to mean designed. Still others use it to refer to laws. Given this confusion, the intended meaning of these terms should always be clarified.
We can take Hodgson’s critique as a starting point in this paper, and build a simple model that could serve as a common reference point among these disparate uses. Section 2 begins with identifying three problems that arise in the political economy literature due to inconsistent usage of informal institutions. Then in Section 3 we briefly review the philosopher John Searle’s theory of institutions. This theory is more general than the social science approach to institutions, in the sense that Searle’s net is cast to include not just political-economic interaction but all of social life. Section 4 then adapts Searle’s framework to build a simple logical model of informal and formal institutions, which is used to address the three identified political economy problems. Section 5 then concludes with a discussion of implications and future work.