Norms and Institution Formation

Patrick Francois ()

No 6735, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyzes the dynamic interaction between norms - internalized restraints on opportunistic behaviour - and institutions - restraints on such behaviour deriving from external enforcement. When individuals following a norm suffer pecuniary losses to doing so, the norm is eroded. Institutions, on the other hand, are strengthened when institution designers are rewarded for improving them. The dynamic interaction between these two factors leads to both good steady states with functioning institutions, widespread norm compliance, and trade, and bad steady states where trade breaks down, institutions are dysfunctional and beneficial norms are violated. The model here shows the situations that lead economies to converge on good steady states rather than bad ones; why countries with a history of institutional success are more likely to be successful in future, why countries with a history of failure will require better institutions to achieve even the same level of compliance, and why functional institutions may not be readily transplated from successful to unsuccessful countries.

Keywords: Economic development; Institutional change; Social norms (search for similar items in EconPapers)
JEL-codes: O17 O43 Z10 (search for similar items in EconPapers)
Date: 2008-03
New Economics Papers: this item is included in nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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