Endogenous Institutional Change Research Articles

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.

Europeanization or endogenous institutional change? The case of Turkey

The Europeanization literature has successfully highlighted the effects of the EU impetus on Turkish domestic actors’ incentives and ability to pursue democratizing reforms. Given the on-going institutional transformation despite the loss of the EU momentum and limited internalization of democratic norms, it is argued that explaining institutional change would greatly benefit from an analytical framework fit to account for both phases of Turkey’s transformation. This study uses a rationalist analytical framework to explore the on-going process of institutional change, focusing on Kemalism as a primarily endogenous institution. Acknowledging the link between the Helsinki Summit and the launch of institutional reform, the evolution of an analytically defined Kemalism is traced and explained in terms of anti-Kemalist collective action facilitated by the instrumentally motivated AKP government.

Minority Group Strategies for Endogenous Institutional Change: Kurdish Parties and Voters in Turkey's 2007 Referendum

Political institutions are socially constructed rules manifesting the preferences and strategic interactions of key actors at decisive moments. We investigate a contentious episode of institutional change in a divided society: the adoption of direct presidential elections in Turkey, approved by referendum in October 2007. Process tracing and regression analyses demonstrate that Kurdish politicians and voters in Turkey supported this reform. However, direct elections are unlikely to increase Kurds’ leverage over choosing Turkey's presidents and may even diminish it. Kurdish support for direct elections is better explained by the reform's broader anticipated impacts on the structuring of state power.

The Transformation of Political Institutions: Investments in Institutional Resources and Gradual Change in the National Party Committees

Institutional theorists have made major progress in recent years examining gradual processes of endogenous institutional change. Building on this line of theorizing, this article highlights an often overlooked source of incremental change in political institutions: investments ininstitutional resources. Unlike path-dependent processes, which are relatively open at the front end and relatively closed at the back end, resource investments made in one period serve to widen an institution's path and enhance its capacity to undertake a broader range of activities in subsequent periods. Drawn out over time, these investments can gradually transform institutional operations and purposes. To illustrate these dynamics, this article reconsiders the transformation of the national party committees into “parties in service” to their candidates. The most influential theoretical explanation for this change is supplied by actor-centered functionalist accounts that either ignore the parties' institutional forms or treat them as mere reflections of actors' preferences. As an alternative, I suggest that investments in two types of institutional resources—human resources and information assets—were integral to the process through which each party changed. Piecemeal investments in these resources gradually enabled each national party committee to provide a wider range of campaign services to its candidates, thereby producing ostensibly new “functions” over time. Though the process of institutional change unfolded at very different times in each party, the same dynamics were on display in both cases.

Da exogeneidade ao gradualismo: inovações na teoria da mudança institucional

Este artigo analisa três inovações analíticas produzidas pela segunda geração do novo institucionalismo histórico sobre o problema da mudança na ciência política comparada. A análise reside na compreensão das alternativas encontradas para superar os limites tradicionais dos modelos centrados em premissas de estabilidade e ênfase causal nos fatores exógenos. O argumento é de que a segunda geração de pesquisas tem produzido um conjunto de sensíveis transformações analíticas e conceituais, incluindo novos conceitos, categorias analíticas e mecanismos causais para compreender a mudança de forma mais apropriada.

Law, Economics and History: Endogenous Institutional Change and Legal Innovation

Understanding the origins of formal and informal institutions of cooperation and regulation and their long-lasting impact on market exchange and technological investment is one of the most pressing questions in law, economics and history. Accordingly, despite the different angles considered by different disciplines, the notion that institutions emerge endogenously in the face of both welfare-enhancing and rent-seeking motives has recently come to be an accepted paradigm. Yet, despite this convergence, an even more vigorous effort in inquiring the determinants and the effects of institutional change is needed in order to guide legal and institutional reforms. The aim of this chapter is to substantiate this desideratum and, at the same time, to provide a new interdisciplinary research agenda.

Climate-related disaster opens a window of opportunity for rural poor in northeastern Honduras

Two distinct views are evident in research on how rural communities in developing countries cope with extreme weather events brought by climate change: (i) that the resource-reliant poor are acutely vulnerable and need external assistance to prepare for such events, and (ii) that climate-related shocks can offer windows of opportunity in which latent local adaptive capacities are triggered, leading to systemic improvement. Results from a longitudinal study in a Tawahka community in Honduras before and after Hurricane Mitch (1994-2002) indicate that residents were highly vulnerable to the hurricane--due in part to previous development assistance--and that the poorest households were the hardest hit. Surprisingly, however, the disaster enabled the poor to initiate an institutional change that led to more equitable land distribution, slowed primary forest conversion, and positioned the community well to cope with comparable flooding occurring 10 y later. The study provides compelling evidence that communities can seize on the window of opportunity created by climate-induced shocks to generate sustained social-ecological improvement, and suggests that future interventions should foster local capacities for endogenous institutional change to enhance community resilience to climate shocks.

Endogenous Institutional Change and Dynamic Capitalism

State-centered theory asserts that political institutions and credible commitment by political elite to formal rules securing property rights provides the necessary and sufficient conditions for economic growth to take place. In this approach, the evolution of institutions favorable to economic performance is a top-down process led by politicians who control the state. Hence, in less developed and poor countries, the counterfactual is that if formal institutions secure property rights and check predatory action by the political elite, then sustained economic growth would follow. The limitation of state-centered theory stems from the problem that behavioral prescriptions - formal rules and regulations - that reflect what politicians prefer can be ignored. In contrast, we lay out the bottomup construction of economic institutions that gave rise to capitalist economic development in China. Entrepreneurship in the economically developed regions of the coastal provinces was not fueled by exogenous institutional changes. When the first entrepreneurs decided to decouple from the traditional socialist production system, the government had neither initiated financial reforms inviting a broader societal participation, nor had it provided property rights protection or transparent rules specifying company registration and liabilities. Instead, it was the development and use of innovative informal arrangements within close-knit groups of like-minded actors that provided the necessary funding and reliable business norms. This allowed the first wave of entrepreneurs to survive outside of the state-owned manufacturing system. This bottom-up process resembles earlier accounts of the rise of capitalism in the West.

Elite support for constitutional reform in the Netherlands

Explaining endogenous institutional change is not the strongest point of neo-institutionalist theory, and various strands of new institutionalism offer different explanations. This paper contributes to this literature by focusing on the attitudes of (Dutch) legislators to political reform: they are able to bring about endogenous institutional change, and by learning more about their attitudes we can better understand when and why institutional change occurs. Using the Dutch Parliamentary Study of 1990 and, primarily, of 2006, it is shown that ideology has substantial explanatory power, as predicted by sociological institutionalism. However, overall explanatory power increases substantially when variables such as party size, which fit better in a rational-choice institutionalist model, are added. Furthermore, the greater support for reforms in 2006 compared to 1990 could be the result of a critical juncture (the end of the Cold War) as predicted by historical institutionalism. These findings support those scholars who argue that these three instituionalist approaches are complementary rather than competing.

Dynamic stability and reform of political institutions

This paper examines endogenous institutional change in a class of dynamic political games. The political aggregation rules used at date t+1 are instrumental choices under rules at date t. Effectively, rules are “players” who can strategically delegate future policy-making authority to different rules. A political rule is stable if it selects itself. A reform occurs when an alternative rule is selected. The stability of a political rule is shown to depend on whether its choices are dynamically consistent. For instance, simple majority rules can be shown to be dynamically consistent in many common environments where wealth-weighted voting rules are not. The result extends to political rules that incorporate private activities such as extra-legal protests, threats, or private investment. The approach is one way of understanding various explanations of institutional change proposed in the literature. A parametric model of public goods provision gives an illustration.

Refraining from Imitation: Professional Resistance and Limited Diffusion in a Financial Market

Why do some practices not spread? Although this is an important question for both diffusion theorists and those interested in institutional change, we know surprisingly little about the limitations on diffusion because most diffusion studies sample on successful diffusion. I address the question of why some practices fail to spread by introducing the concept of a “deviance discount.” A deviance discount is a systematic downgrading of the observed adoption performance of controversial practices, which limits the contagion of such practices. I test and find qualitative and quantitative support for my thesis in the product introduction behavior of Swedish mutual fund firms. My findings hold implications for diffusion theory and theories of endogenous institutional change.

Political Survival and Endogenous Institutional Change

Incumbent political leaders risk deposition by challengers within the existing political rules and by revolutionary threats. Building on Bueno de Mesquita, Smith, Siverson, and Morrow's selectorate theory, the model here examines the policy responses of office-seeking leaders to revolutionary threats. Whether leaders suppress public goods such as freedom of assembly and freedom of information to hinder the organizational ability of potential revolutionaries or appease potential revolutionaries by increasing the provision of public goods depends, in part, on the sources of government revenues. Empirical tests show that governments with access to revenue sources that require few labor inputs by the citizens, such as natural resource rents or foreign aid, reduce the provision of public goods and increase the odds of increased authoritarianism in the face of revolutionary pressures. In contrast, without these sources of unearned revenues, governments respond to revolutionary pressures by increasing the provision of public goods and democratizing.

Endogenous institutional change after independence

Independence from colonial rule was a key event for both political and economic reasons. We argue that newly independent countries often inherited sub-optimal institutional arrangements, which the new regimes reacted to in very different ways. We present a model of endogenous changes in property rights institutions where an autocratic post-colonial elite faces a basic trade-off between stronger property rights, which increases the dividends from the modern sector, and weaker property rights that increases the elite's ability to appropriate resource rents. The model predicts that revenue-maximizing regimes in control of an abundance of resource rents and with insignificant interests in the modern sector will rationally install weak institutions of private property, a prediction which we argue is well in line with the experience of several developing countries.

Adaptive Informal Institutions and Endogenous Institutional Change in China

Under certain circumstances, the etiology of endogenous institutional change lies in the informal coping strategies devised by local actors to evade the restrictions of formal institutions. With repetition and diffusion, these informal coping strategies may take on an institutional reality of their own. The author calls the resulting norms and practicesadaptiveinformal institutions because they represent creative responses to formal institutional environments that actors find too constraining. Adaptive informal institutions may then motivate elites to reform the original formal institutions. This contention is illustrated by three major institutional changes that have occurred in the course of China's private sector development since the late 1970s—the legalization of private enterprise, the admission of capitalists into the Chinese Communist Party, and the amendment of the state constitution to promote the private economy.

What's on the path? Path dependence, organizational diversity and the problem of institutional change in the US economy, 1900–1950

Institutionalists commonly invoke exogenous shocks or the transposition of logics across national systems to explain institutional change and new path creation. Using organizational data on American infrastructure industries, this paper shows instead how established institutional paths contain within them possibilities and resources for transformation and off-path organization. Even settled paths are typically littered with flotsam and jetsam - with elements of alternative economic orders and abandoned or partly realized institutional projects. These elements of 'paths not taken' are legacies of constitutional struggles and movements for alternative forms of order whose settlement or defeat help fix the path that triumphed. Moreover, they represent resources for endogenous institutional change, including the revival, reassembly, redeployment and subsequent elaboration of alternative logics within national capitalisms. As the analysis of the US case shows, such legacies underwrote the construction of an entirely different, cooperatively organized path alongside the dominant path of impersonal markets and for-profit corporations. Taken together, these findings generate new leverage for explaining institutional change. They also highlight features of the US case that have been ignored by institutionalist and 'varieties of capitalism' research, including internal structural variety, endogenous change processes, and the co-evolution of cooperative or coordinated and liberal market economies within American capitalism.

Endogenous Institutional Change in the Mexican Senate

This article studies the endogenous transformation of the Mexican Senate. Changes in the electoral rules for the Senate composition are explained as an effort by the Partido Revolucionario Institucional (PRI) politicians to protect their majority in a broader strategy of division and cooptation of its opponents. That strategy expanded seats for the opposition while reducing risks for the incumbent party. The article calculates, through Monte Carlo simulations, counterfactual scenarios for the composition of theMexican Senate under alternative electoral rules. Those simulations highlight the inherent uncertainty involved in institutional design. In spite of the demise of the PRI in the 2000 presidential election, the Senate will afford in the foreseeable future veto power to the hitherto hegemonic party.

Dynamic Stability and Reform of Political Institutions

When are political institutions stable? When do they tend toward reform? This paper examines a model of dynamic, endogenous institutional change. We introduce the class of dynamic political games (DPGs), dynamic games in which the political aggregation rules used at date t+1 are chosen by the rules at date t, and the resulting institutional choices do not affect payoffs or technology directly. A political rule is stable if it selects itself for use in the following period. A reform occurs when an alternative rule is selected. Absent an essential private sector, it is shown that institutional reform occurs if and only if the current political rule is dynamically inconsistent. Roughly, a rule is dynamically consistent if it is rationalized by a time separable, state invariant social welfare criterion. Simple majority rules are usually dynamically consistent. However, wealth-weighted voting rules are not. More generally, we identify sufficient conditions for stability and reform in terms of recursive self-selection constraints that treat the rules themselves as players who can strategically delegate future policymaking authority to different institutional types. These ideas are illustrated in a parametric model of dynamic public goods provision.

A Theory of Endogenous Institutional Change

This paper asks (a) why and how institutions change, (b) how an institution persists in a changing environment, and (c) how processes that it unleashes lead to its own demise. The paper shows that the game-theoretic notion of self-enforcing equilibrium and the historical institutionalist focus on process are both inadequate to answer these questions. Building on a game-theoretic foundation, but responding to the critique of it by historical institutionalists, the paper introduces the concepts of quasi-parameters and self reinforcement. With these concepts, and building on repeated game theory, a dynamic approach to institutions is offered, one that can account for endogenous change (and stability) of institutions. Contextual accounts of formal governing institutions in early modern Europe and the informal institution of cleavage structure in the contemporary world provide illustrations of the approach.

The Puzzle of Firm Performance in China: An Institutional Explanation

China has achieved phenomenal economic growth in an institutional environment that defies conventional economic rationales. Researchers offer different theories to explain this puzzle. But so far, due to the lack of data, little effort has been made to test these theories at the firm level. We develop a framework of endogenous institutional change to explain this puzzle and we test our framework with firm-level data. We argue that the decentralization from the central to the local governments and from government to firms are the driving forces behind China's institutional changes that have shaped the roles of government and market, which in turn significantly affect firm performance. We then submit our theory to a vigorous empirical test using data from China's industrial census, covering all 2000 counties and over 500 manufacturing industries. The test shows that two results of decentralization, the involvement of low-level governments in business and the process of privatization, positively affect firm performance.

The Household Responsibility System in China's Agricultural Reform: A Theoretical and Empirical Study

The emergence and eventual prevalence of the household responsibility system, which replaces the production team system as the unit of production and income distribution, has brought about dramatic changes in China's rural areas since 1979. This institutional change has resulted in remarkable growth in agricultural productivity.' However, in the literature on collective farms, a theory that is capable of explaining the causes and effects of this change is yet to be developed. The formal theory about collective economies developed so far by Ward, Domar, Sen, Oi and Clayton, Bradley, Maurice and Ferguson, Cameron, Bonin, Chinn, Israelsen, Putterman, and others suggests that the allocation of resources in a collective farm is efficient at least in