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iThe Game-Theoretic Revolution inComparative and Historical Institutional AnalysisAvner Greif1 May 2002iiContents1 IntroductionPart I: Studying Economic Institutions2 Three Generations of Institutional Analysis in Economics3 Institutions as Complementary Institutional Elements Part II: Game Theory and the Institutions Around Us: Cultural Beliefs, Rules, andOrganizations4 Game-Theoretic Restrictions on Behavioral Cultural Beliefs5 Institutions, Trust, and Agents: The Maghribi Traders6 Organizations, Beliefs, and the State: The Merchant Guild 7 Institutions as Complementary Cultural Beliefs, Rules, and OrganizationsPart III: Game Theory and the Institutions Within Ourselves: Social Propensities8 We Are Friends, Right? Social Relationships9 We Have Feelings Too! Social Preferences10 Social Preferences and Institutional Analysis: Internalized Norms andEmotionsPart IV: Combining Game Theory and Empirics in Positive Institutional Analysis11 Is Game Theory Sufficient for Institutional Analysis?12 What is Going on Here? Identifying Institutions using Interactive,Context-specific Analysis13 Applying Context-Specific Analysis: Institutions and ImpersonalExchangePart V: Preliminary to Institutional Dynamics14 Is Institutional Dynamics a Historical Process?Part VI: Institutional Dynamics as a Historical Process15 The Influence of a Past Institution on its Rate of Change: Reinforcementand Endogenous Institutional Change16 The Influence of Past Institutions on the Direction of Institutional Change:Structure and Agency17 Institutional Complexes, Social Capital, and Culture18 Context-Specific Analysis of Institutional Dynamics: PredictingInstitutionsPart VII: Concluding Remarks19 Conclusion: the Challenge of Institutional Change1 For surveys of these developments, see, for example, Eggertsson (1990); Furubotn and Richter(1997); Hodgson (1998); Milgrom and Roberts (1995); Williamson (1996); Hart (1995); Bardhan (1991);Barzel (1989); Greif (1996b, 1997a, 1997c, 1997d, 1997e, 1998) in economics. Weingast (1996); Bateset al. (1998); and Thelen (1999) in political science. Coleman (1990); Gravnovatter (1985); Powell andDiMaggio (1991, introduction); Smesler and Swedberg (1994); Scott (1995); and Brinton and Nee (1998)in sociology. 5/1/02I - 1&Chapter 1: IntroductionInstitutions matter and conviction in this statement is well reflected in the recent surge ofinterest in institutional analysis in the social sciences.1 But what exactly are institutions? Howcan we empirically study them? Why do societies fail to adopt the institutions of moreeconomically successful ones and why do they evolve along distinct trajectories of institutionaldevelopment? This book presents and integrates recent developments in addressing thesequestions that build on advances in game theory. Until recently, the main perspective used by economists to study institutions bears thefootprints of Hobbes, Adam Smith, and Coase. Hobbes’s assertion that without a state, lifewould be “solitary, poor, nasty, brutish and short” corresponds to the dominant approach tostudy economic institutions as rules specified and enforced by the state. Politically determinedrules together with their enforcement mechanisms influence economic efficiency by constitutingthe “rules of the economic game” (North 1990). Institutions determine the cost of transactingand hence, as argued by Adam Smith, the division of labor, the extent of the market, and theresulting efficiency gains from specializations and inventions. Within the markets created byformal rules, economic agents choose the contractual and organizational forms aimed atminimizing transaction costs (Coase 1937, Williamson 1985). But transaction costs place awedge between the efficiency and distributional implications of given rules and hence,institutions matter.To a large extent, institutional change thus reflects the whim of the political agents. Their ability to alter rules by fiat, however, is constrained by the enforcement mechanisms thatare at their disposal and by “informal,” culturally-determined rules such as social norms,traditions, and customs. Hence, inter-societal distinctions in the objectives of the politicalagents, enforcement mechanisms and informal rules cause societies to evolve along distinctinstitutional trajectories.5/1/02I - 2While the contribution of this perspective is beyond doubt, it leaves much unanswered. Consider, for example, the analysis by North and Thomas (1973) of the spectacular commercialand economic expansion in Europe during the late medieval period. Early on feudal lords"fought amongst themselves; but gradually, ... the strife declined" (p. 11). Peace and the securityof property rights enabled population growth and the realization of gains from "commercebetween different parts of Europe" that "had always been potentially of mutual benefit" (p. 11). The "revival of trade led ... to a host of institutional arrangements [such as insurance contractsand the bill of lading] designed to reduce market imperfections" (p. 12).This institutions-as-rules-cum-transaction-costs interpretation, however, ignores a host ofrelevant questions. First, it ignores the need to consider the institutional foundations of politicaloutcomes. What, if any, were the institutions that curtailed fighting? Clearly, there was no“state” that could have prevented war between different political entities. But also within apolitical unit, no entity had a monopoly over coercive power. How as peace sustained? Second,this interpretation ignores the need to consider the institutional foundations of markets. Duringthe late medieval period there were no states to provide the institutional support required forlong-distance trade. What were the institutions that ensured property rights security formerchants while traveling or sending their goods abroad? What institutions provided thecontract enforcement required to facilitate long-distance trade by, for example, the use of agents? Furthermore, was trade expansion only a function of peace and factor endowments, or didinstitutions influence the time, place, and extent of trade expansion?Finally, the analysis fails to account for the observed institutional dynamics. Why did theemerging European institutional arrangements differ from those that emerged in other(technologically similar) economies in response to increased trade? Early in the above period,European contractual and organizational forms were the same


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