Institutional Changes: Alternative Theories and Consequences for Institutional Design

This paper surveys alternative approaches to the emergence and evolution of institutions. The challenge is to develop frameworks capable of capturing both stability and change. We follow a “descaling” approach to show how founding assumptions about economics—namely, alternative assumptions about individual rationality and the role of social efficiency— influence our understanding of the drivers of institutional evolution. We then contrast two families of institutional theory. In the first, institutions are viewed as rules imposed on individuals and the focus is on the strategic games among coalitions that aim to promote or block new rules. In the second, institutions are viewed as shared beliefs; here the idea is to analyze how equilibria that are self-enforcing (in terms of mutual expectations about others’ behaviors) can collapse and so induce switching to another equilibrium. Finally, we discuss the political economy literature that examines institutional transitions to a market economy, and we identify long-term drivers as well as short-term political barriers to institutional reforms.