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Discussion Paper Details

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Title: Norms and Institution Formation

Author(s): Patrick Francois

Publication Date: March 2008

Keyword(s): Economic Development, Institutional Change and Social Norms

Programme Area(s): Development Economics and Public Economics

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.

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Bibliographic Reference

Francois, P. 2008. 'Norms and Institution Formation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6735