The Normative Foundations of Institutions and Institutional

Change

Avner Greif

Definitions

• Norms are normative standards (rules)– About outcomes and processes– The Good/Bad, Right/Wrong, …

• Values– internalized norms – internal system of sanctions

Norms matter

• Focal point, coordination

• E.g., social norms, preferences’ falsifications, cultural beliefs, conventions

• Analytic restrictions – game theoretic eq.

• Kuran, Greif, Young, Binmore

Do values matter?

But they possibly matter…

• Experiments – altruism, equality-aversion, conditional

reciprocity.

• Retrospection– military service, voluntary donations, the Peace

Corps, …

In institutional economics?

• Consensus is that values are important

• A black box

• Exogenous constraints → higher enforcement cost.

Objective: open the black box

Objective:

• A conceptual framework for integrating values in NIE

• Sociology?– Parsons: Order, normative automata– Wrong: functionalist, conformity,

behavior– Current: Social networks cognition

In Economics

• Separable utilities–Propensity perspective

• Inter-dependent utilities–Societal perspective

Propensity perspective:Separable utilities

• Evolutionary GT: ‘self-regarding’ traits

• Classical GT: internalizing eq. behavior

• Experimental economics: social preferences

Societal perspective: Inter-dependent utilities

• Evolutionary game theory– Evolutionary stability of pro-social traits

• Psychological game theory: – Beliefs dependent utility functions

• Sugden, Binmore, Frank, Bowles, Gintis, Fehr, Greif, …

Societal perspective: Inter-dependent utilities

• Game theory– Agents: capacity to internalize norms – Socialization Horizontal (peer), Vertical

– Equilibrium: values and behavior

– Analysis: welfare, inheritanceCS on a policy (direct democracy)

– Andreoni, Bowles and Gintis, Tabellini, …

A promising venue for NIE?

• Socializing agents

• Socialized agents

• Policy-makers

Socializing agents

• Choice of socializing behavior – benefit (own+ socialized agent), cost

• Exogenous: – Others’ values (altruism, revenge)– ‘Formal’ institution

• Equilibrium values & soc. Beh.

Socialized agents

• Behavioral choices – Trade-off between values and other sources of

motivation– Exogenous: values, formal institutions, …

• Equilibrium: behavior

• Special case: socializing agents = socialized

Policy-maker

• Choosing economic policies/institutions – Preferences over outcomes – Values (ignore for simplicity)

• Exogenous: others’ values, etc..

• Policy/institutions can influence values– Indirectly: impact socialization processes– Directly: socializing organizations, force

Systemic analysis (eq.)

• Values, behavior, eco. institutions, policy

• Politics - the process of achieving a pol. goal– Values imply constraints and opportunities

• Political institutions (endogenous policy-maker)– equilibria in the relations between the policy-

makers and economic agents, given values

Concerns

• The right or important origin of values?

• Analytically tractable?– Too complicated?

Concerns

• Unobserved?

• But so is the invisible hand, transaction costs, opportunity costs, shadow prices, preferences, …

Is it useful?

• Even using informal partial eq. analyses → new insights

– ‘Formal, informal’ relations, inst. change– institutional foundations of markets,

optimal property rights, politics, institutional change as a moral crisis, ….

• What follows provides some examples

Values and market failure• Fail w/o ‘anti-trade’ norms • Even if reciprocators• Imperfect monitoring →

disputes may occur → revenge (lawlessness)

• If expected cost from revenge > gain from exchange → market failure

Implications?• Code of conduct (‘law’)– Reducing uncertainty in interpretation

• Conduct-certifying organizations (‘legal system’)– Improves monitoring– Justifying non-violence

• Legal system– Punishing: satisfy the ‘revenge constraint’ /allow trade– Deterring ‘private justice.’– History: from revenge to legal compensation.

• Policy? Interests of the policy-maker?

Value-based market failure: limited commitment

• Some agents are reciprocators, some are not

• Unraveling → market failure

• Legal sanction → preventing unraveling – Direct and indirect impact (on socializations)– If indirect, time consuming transition– Higher return from concentrated legal invest.?

Property Rights Allocations

• Example: – Homeless newspapers

• Altruism → identity matters for non-economic reasons

• Wedge between the socially optimal and the economically efficient property rights

• Higher contribution and higher eq. value.• Value to policy to values/static-dynamic eff.

Values constrain policy

• Legitimacy meta-norms:whose rules are normatively binding,and with respect to what.

• Examples–65mph rule–Prohibition (1920-1933) – Muslim world

• Either case, two equilibria

Values provide opportunities:Politics

• Framing– ‘Your seatbelt is their security’ (1970)– Social Security: Insurance or welfare?

• Leadership• ‘Path of least normative resistance’– Luther King Jr. versus Malcolm X

• Beyond the model.

Values influence on politics

• Distinct legitimacy norms– West: Representation & Corporations– Muslim ME: Religious authorities

• The essence of politics– Interest groups representing corporate entities– Co-opting the religious authorities

Institutional change ?

• Comparative Statics

• Institutions have normative foundations• Manifestation: investment in institutional

‘moral basis’– Seatbelt laws, don’t drink and drive laws, …– The Dissolution of the Monasteries (1534)

Institutional change as a moral crisis

• Incompatibility between institutions and their normative foundations → changes

• Institutional change? Either – Same outcomes (behavior), but followed for

reasons other than values • Social security: values, elderly voters

– Same motivation (value), another outcome (no 65mph speed limit)

• Power matters

Why incompatibility?• Power corrupts → ‘immoral’ behavior/rules– The Reformation, 1517-1648 and its essence– Power? Nobles & the power of the print

• Abuse of the system– UK‘s ‘rotten borough,’ 1832 Reform Act– Power of the rising cities

• Exogenous normative change– Slavery. Power: Parliamentary legislation.– Endogenous? parametric shift influencing socialization

Concluding comments

• A conceptual framework / issues

• Some examples of how it can contribute to integrating values in institutional analysis

• At the least, food for thought.

• Is it a promising way to proceed? • The way forward?