The US financial crisis: lessons for theories of institutional complementarity

Many comparative political economists hold that market performance depends on the presence of institutional complementarities. Some argue that when institutions reinforce similar incentives markets work best. Others disagree and argue that for markets to function well institutions must compensate for each other’s shortcomings rather than reinforce each other’s incentives. This paper uses evidence from the US financial crisis of 2008 to adjudicate this debate. It argues that different types of institutional complementarities are necessary in combination to ensure market stability and successful economic performance. Without such balance, complementarities that are beneficial for a while may go wrong later. In this regard, the paper also draws attention to the dynamic and historically specific nature of institutional complementarities.