Endogenous Institutional Change Research Articles

Institutional change and ecological structural change

The paper presents a model discussing the political economy dimension of the green transition. There are brown sectors whose share in value-added and employment should contract and green sectors whose share should increase. Green technological changes require more skilled workers, potentially exacerbating inequalities between them and unskilled workers. Trade unions advocate for a “Just Transition”, ensuring income protection and creating new “green jobs”. However, the green restructuring of the economy demands highly subsidized investments in the short run. A political economy problem arises: how to regulate brown capitalists, support green capitalists, and prevent unskilled workers from joining forces with brown capitalists to block the green transition. The solution can be positive feedback between green technical change, non-price competitiveness, and employment. The BOPCG model allows for highlighting the role of catching up in green technologies in non-price competitiveness and endogenous institutional change to give rise to a growth path consistent with the idea of a “just green transition”.

Incumbents’ in/ability to drive endogenous sustainability transitions in livestock farming: Lessons from Rotenburg (Germany)

Livestock farmers, as incumbents, face pressures to transition toward sustainability. We study these actors’ role in this process, particularly their in/ability to contribute to endogenous institutional change. Our study entails an interview-based single case study with farmers based on institutional theory. We find “partaking” to be the likely form of endogenous change, as incumbents predominantly rely on routine and sensemaking agency. They externalize the locale of change to other actors whom they expect to change framework conditions. However, we find contrasting examples that may drive institutional change in livestock farming. We also discuss incumbents’ ambivalent role and embedded agency in these change processes. “Strategic agency” and the ability to imagine alternatives are important aspects for perceiving agency in transitions. Hence, we recommend that regional policy-makers and change agents work with farmers to create alternative imaginations for livestock farming with the restructive and affective power to disrupt existing practices and structures.

An Ethnography of Endogenous Institutional Change in Community-Driven Development

An Ethnography of Endogenous Institutional Change in Community-Driven Development

Reflections on the particular and the universal: unity and diversity in social life and social theory

How do the general and the specific, or unity and diversity, relate to social life and political practice? The essay investigates four areas of social theory that may be fruitfully explored in terms of a constitutive tension between universal and local forces: endogenous institutional change, the role of intermediary organizations in the governance of industrial relations, nation-building, and the origin of capitalist diversity.

Experts versus representatives? Financialised valuation and institutional change in financial governance

ABSTRACT Valuation devices and institutional change are key aspects of financialisation, but have been largely separated in the literature. This article explores the causal link between both concepts. We draw on the linked ecologies framework to argue that financialised valuation, such as market valuation of assets and liabilities, creates opportunities for financial experts to influence policy processes. Making use of their institutional position, experts frame policy problems to advance further financialisation as a solution. So doing, they perform essential boundary work to tie authority over financial knowledge to their social position as financial market actors. The result is a process of endogenous institutional change, whereby financial experts increasingly displace other actors in governance arrangements. We illustrate this argument providing a case study of pension fund governance in the Netherlands. There, financialised valuation requirements led to a crisis of pension funding, to which policymakers responded by strengthening experts’ positions on pension fund boards, thereby eroding century-old corporatist institutions. We show how the infrastructural entanglements between financial markets and the state in the Dutch pension system not only benefited financial actors’ institutional positions, but also point to limits of financial agency as the state increased its own capacity over a formerly corporatist domain.

Institutional changes, inequality and long-run economic development: Theory and empirics

This paper reviews theoretical and empirical literature on long-run economic development, institutional dynamics, and their interplay. Special attention is given to papers that explore the reasons why pro-growth reforms and institutional changes may be blocked. Among these reasons, over the past years the literature has increasingly focused on inequality in the distribution of wealth and political power as a key factor. This review is structured around two major theoretical approaches that illuminate the reasons behind the transition from stagnation to growth and cross-country income divergence: the unified growth theory (UGT), and the theory of endogenous institutional change. Using the empirical evidence on divergence between European and Middle Eastern economies, as well as the divergence within Europe, the paper demonstrates the value of these approaches in explaining the observed patterns of cross-country long-run development. The paper concludes with outlining several promising directions for future research.

Push factors of endogenous institutional change

Institutions are often modeled as Nash equilibria. The puzzle is how an institution can change endogenously, given that all players choose mutually best responses. To address this issue, the present paper proposes a framework that explicitly models players’ goals. It argues that the probabilities of attainment of players’ goals affect the stability of Nash equilibrium. If players fail to attain their goals in a Nash equilibrium, then this equilibrium is goal-unstable, as players are motivated to displace it. This goal-instability represents a push factor of institutional change. Since the goal-instability does not need to presuppose players’ knowledge of the desired outcome, the approach is consistent with the notion of entrepreneurial institutional innovation. It is shown that the proposed framework can provide micro-foundations for existing theories and extends the analysis to include open-endedness and the creative aspects of institutional change. This framework is applied to account for a change from coins to banknotes as a medium of exchange.

Imperial Governance and the Growth of Legislative Power in America

AbstractThe power of assemblies in the British new world grew far beyond the bounds intended at their creation. Although the British crown instructed royal governors to use legal powers to restrain assemblies, they were unsuccessful. I develop a formal model to account for this. In this model colonial assemblies can challenge the agenda setting powers of colonial governors. “Strong” governors withstand these challenges easily; “weak” ones prefer to capitulate. The crown wishes to retain only strong governors; however, it observes only policy outcomes but not the resolution of challenges to the governor's agenda power. In equilibrium, the crown cannot distinguish between a strong governor holding agenda power against a tough assembly, and a weak governor conceding agenda power to a moderate one. Weak governors therefore avoid conflict with the assembly, yet conceal their weakness from the crown. But the assembly observes the governor's concessions, and challenges weak governors even more in the future. This creates a dynamic path of growing assembly power. The model provides a strategic logic of endogenous institutional change, and one of the most important institutional developments in American history: the growth of legislative power.

On Trade, Distributional Conflict, and Endogenous Regime Change

Can we expect shocks in trade openness to affect the quality of the domestic political process, and in what way? Isolating cross-country heterogeneity in the distributional effects of trade shocks for different relative factor endowments as a critical element for theory development, the paper tackles the puzzle by formally developing and solving a new probabilistic model to link the distributional effects of shocks to endogenous institutional change via induced conflict between a capital-intensive and a labour-intensive coalition. The model of distributional conflict combines a political selection stage to select the rate of income redistribution by majority voting and a constitutional conflict stage among factor-intensive coalitions whose steady state outcome determines the level of institutional inequality assigning the “rules“ of political selection. The former is modelled via a canonical weighted median voter setup with the (infinitely many) weights-distributions induced by the value of the steady state outcome of the constitutional conflict stage, while the latter is modelled as a Tullock contest with an endogenous contest success function and the heterogeneous coalition prizes equalling the expected value of the contest to each coalition as a function of the coalitions' efforts. Closed form solutions are derived for (i) the expected outcome of distributional conflict in terms of institutional quality and (ii) the intensity of conflict. Via comparative static analysis based on the Stolper Samuelson theorem in Heckscher-Ohlin trade theory, it is formally shown that positive shocks in trade openness always induce higher institutional inequality irrespective of heterogeneity in the underlying distributional effects, but that the expected mechanisms driving the drop in quality differ across capital-abundant and labour-abundant countries.

Household responsibility system and China's agricultural Growth revisited: Addressing endogenous institutional change

AbstractThe rise of the Household Responsibility System has been widely viewed as a significant contribution to China's agricultural growth. However, this empirical conclusion is rested upon a convenient but doubtful presumption that the process of institutional change, also known as decollectivization, is exogenous. We contribute to this literature by explicitly recognizing the endogeneity of institutional changes, and exploit exogenous variations in lagged weather shocks and initial fixed assets for consistent estimation. With improved data on irrigation, mechanization, weather and institutional changes in a provincial panel data during 1970–1987, the results of panel instrumental estimations reveal that the Household Responsibility System had a significantly positive effect on China's agricultural growth, which was larger than indicated by OLS estimates that suffer from adverse selection and attenuation biases.

Periodizing, paths and probabilities: why critical junctures and path dependence produce causal confusion

ABSTRACTThis review examines four recent works in political economy seeking to make sense of the political and economic changes of the 1970s. This recent wave of work increasingly sees these institutional changes as the result of forces endogenous to the political and economic institutions of the post-war era, but it also continues to make use of the common practice of seeing history as an alternation between deterministic path dependence and contingent critical junctures. This review argues that when applied to these and similar endogenous arguments, the approach of path dependence and critical junctures is unable to empirically distinguish between deterministic and contingent processes, despite being conceptually predicated on the distinction between the two. This argument is demonstrated by showing that these arguments about the transformations of the 1970s can be flipped between deterministic and contingent explanations based on nearly the same empirical evidence. The review then addresses the recent development of ‘gradualist’ mechanisms of institutional change, like drift, layering, and conversion, to show that they do not resolve this difficulty. The review concludes by proposing a research agenda based on an alternative empirical approach specifically tailored to understanding endogenous institutional change.

Tracing the Local Origins of Farmland Policies in Japan—Local-National Policy Transfers and Endogenous Institutional Change

Japan’s agricultural support and protection regime appears as a particularly persistent relict of the country’s postwar political economy. Yet, it is also by no means static. This article frames the trajectory of Japan’s agricultural support and protection regime as a process of gradual endogenous institutional change. The pace and direction of this process are not only determined on the macro level, but also in the ‘local’. To illustrate this argument, the article traces the local origins of recent policies toward farmland consolidation surrounding a major revision of the Agricultural Land Law in 2009. This revision deregulated corporate farmland access, but also prepared the ground for a new approach to public farmland allocation to expanding farms. The latter was sourced from certain local farmland governance models. At a closer look, these local models are not only ‘best practices’ to achieve farmland consolidation, but also reflect the ‘defensive’ interests of the incumbent local stakeholders of the postwar agricultural support and protection regime, such as the local branches of JA, the powerful organization of agricultural cooperatives. More generally, the article proposes to understand local-national policy transfers as a mode of endogenous institutional change.

Strategic rationality and endogenous institutional change

Strategic rationality and endogenous institutional change

The Entrepreneurial Engine of Institutional Change [ACERE 2017 Conference Paper

In this paper, I take a closer look at how very talented people read the institutional framework – and what choices they make inside of this framework. My aim is to develop a theory of institutional change based on the work of North, and especially his 1993 paper in which he called for the development of a theory of institutional change and provided a set of definitions and a framework to start with. His initiative has since been joined by the new institutional economics and parts of his framework have been developed, but there is one side that has not been much researched: how the entrepreneurs impact institutions. The question seems nonetheless a crucial one to me, since, to North, the institutional change is an endogenous process in which the entrepreneur is the agent of change. To my knowledge, only two publications dived into this question: Lopez and Leighton (2012) and Tarko (2015) that both focus on political entrepreneurs and the impact of ideas and intellectual innovations on institutions. Hence this is my attempt of a theory of endogenous institutional change centered on the entrepreneur’s choice – and how the interactions of institutions and entrepreneurs affect the development of the economy. The framework, theory and model that I develop here can be applied on any country with any level of development. It is to be used to assess the quality of the institutions and how they encourage entrepreneurs towards innovation, which ultimately leads to economic development.

Endogenous dynamics of institutional change

A parsimonious set of mechanisms explains how and under which conditions behavioral deviations build into cascades that reshape institutional frameworks from the bottom up, even if institutional innovations initially conflict with the legally codified rules of the game. Specifically, we argue that this type of endogenous institutional change emerges from an interplay between three factors: the utility gain agents associate with decoupling from institutional equilibria, positive externalities derived from similar decoupling among one’s neighbors, and accommodation by state actors. Where endogenous institutional change driven by societal action is sufficiently robust, it can induce political actors to accommodate and eventually to legitimize institutional innovations from below. We provide empirical illustrations of our theory in two disparate institutional contexts—the rise of private manufacturing in the Yangzi delta region of China since 1978, focusing on two municipalities in that region, and the diffusion of gay bars in San Francisco in the 1960s and 1970s. We validate our theory with an agent-based simulation.

Institutional layering, displacement, and policy change: The evolution of civic service in Israel

This study explores the process of endogenous institutional change. It utilizes the concepts policy layering and displacement to explain gradual but yet significant and cumulative institutional change that has taken place in civic national service policy in Israel. Layering was an expedient strategy of change given the highly charged politics surrounding national service and the opposition of ultra-orthodox and Israel’s Arab citizens to any form of service. While the government and administrative agencies were the primary agents of change, we will also take note of the important and contentious role of Israel’s High Court of Justice which served as a catalyst to policy change, compelling the government to end policy drift. However, it is important to note that judicial intervention may also derail gradual reform as will be shown in the Israeli case.

Elites, institutions and growth

I discuss the debate between North and Thomas and Clark. I argue institutions do not cause growth, but institutional change does. I expound a theoretical model where the circulation of elites entails endogenous institutional change and growth. I prove a generation taken in isolation can increase its welfare by a unilateral reduction in institutional change, in societies where groups that compete for accession to the ruling class are relatively smaller in size; and by a move to more, in societies where those groups are relatively larger. I prove the former are dynamically efficient societies; and the latter, dynamically inefficient.

When Do Institutions “Bite”? Historical Institutionalism and the Politics of Institutional Change

Historical institutionalist theories of endogenous change have enhanced our understanding of institutional development by providing a theoretical vocabulary for analyzing how institutions may be renegotiated over the long run by social and political actors. In these theories, however, the causal impact of institutions themselves on political outcomes, including their own change and reform, is less developed—a significant problem for an institutional research program. This article addresses this problem by proposing strategies that integrate historical institutionalism’s insights into endogenous institutional change with a systematic analysis of the institutional conditions under which “bottom-up” processes of gradual change are likely to be counteracted. In particular, the institutionalization of cultural categories and the allocation of power over the timing of reform within institutional and policy configurations are important variables for understanding how preexisting institutions may enable institutional incumbents to channel, delay, or prevent institutional change altogether.

Endogenous Institutional Change and Privileged Groups

Since the recent advances in the institutional perspective of economic development, there is considerable increase in the literature on the evolution of institutions. In this study, while employing the game theoretic approach, we explore the rent-seeking fundamentals of institutions. We model the manner in which the rent-seeking behaviour of state actors results in inefficiency of the institutional framework. The main focus is on the rents provided by the availability of natural resources wealth, foreign aid or corruption potential. By originating a framework where rulers, agents of the state, and citizens act endogenously, we show that the rents from these resources can be a significant constraint to institutional reforms. In order to come out of the bad institutions trap, the society needs to offer a substantial amount of incentives to the privileged groups. The focus is on two privileged groups, i.e. the rulers and the state agents. In most of the societies, these two groups have the highest bargaining power in the negotiations over the rules and institutions. JEL Classification:JEL Classification: P48, P16, P14, O43, D73 Institutional Reforms, Natural Resources Wealth, Foreign Aid,Corruption Potential, Rulers, Agents of the State

Endogenous Dynamics of Institutional Change

A parsimonious set of mechanisms explains how and under which conditions behavioral deviations build into cascades that reshape institutional frameworks from the bottom up. Specifically, we argue that endogenous institutional change emerges from an interplay between three factors: the utility gain agents associate with decoupling from institutional equilibria, positive externalities derived from similar decoupling among one’s neighbors, and accommodation by state actors. Where endogenous institutional change driven by societal action is sufficiently robust, it can induce political actors to accommodate and eventually to legitimize institutional innovations from below.