Institution-building in a decentralized, market-based economy

Katja Kalkschmied, Joern Kleinert () and Manuela Mahecha-Alzate ()
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Joern Kleinert: University of Graz, Austria
Manuela Mahecha-Alzate: University of Geneva, Switzerland

No 2021-10, Graz Economics Papers from University of Graz, Department of Economics

Abstract: Institutions are pervasive and occur in many shapes. They are embodied in rules, norms, organizations and material artifacts such as money. In this paper, we analyze the most important institutions in market economies: markets and firms. We draw on Aoki's (2001) game-theoretic approach to formalize how markets and firms are built, sustained and changed in a decentralized manner by decisions of private parties. Markets and firms are therefore private-order institutions and distinctively different from pragmatic institutions which are outcomes of centralized planning by the state. Yet, the decentralized building of private-order institutions is critically influenced by the state. We discuss how legislation and specific state interventions can direct private-order institution-building in a decentralized, market-based economy. We further discuss the role of ideas for state interventions to be successful.

Keywords: endogenous institutions; private-order; decentralized institution-building; state interventions (search for similar items in EconPapers)
JEL-codes: E02 L22 P51 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-cwa and nep-mac
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