1. The Normative Foundations of Institutions and Institutional Change Avner Greif

2. Definitions Norms are normative standards (rules) – About outcomes and processes – The Good/Bad, Right/Wrong, … Values – internalized norms – internal system of sanctions

3. Norms matter Focal point, coordination E.g., social norms, preferences’ falsifications, cultural beliefs, conventions Analytic restrictions – game theoretic eq. Kuran, Greif, Young, Binmore

4. Do values matter?

5. But they possibly matter… Experiments – altruism, equality-aversion, conditional reciprocity. Retrospection – military service, voluntary donations, the Peace Corps, …

6. In institutional economics? Consensus is that values are important A black box Exogenous constraints → higher enforcement cost.

7. Objective: open the black box

8. Objective: A conceptual framework for integrating values in NIE Sociology? – Parsons:Order, normative automata – Wrong:functionalist, conformity, behavior – Current:Social networks cognition

9. In Economics Separable utilities – Propensity perspective Inter-dependent utilities – Societal perspective

10. Propensity perspective: Separable utilities Evolutionary GT: ‘self-regarding’ traits Classical GT:internalizing eq. behavior Experimental economics: social preferences

11. Societal perspective: Inter-dependent utilities Evolutionary game theory – Evolutionary stability of pro-social traits Psychological game theory: – Beliefs dependent utility functions Sugden, Binmore, Frank, Bowles, Gintis, Fehr, Greif, …

12. Societal perspective: Inter-dependent utilities Game theory – Agents: capacity to internalize norms – SocializationHorizontal (peer), Vertical – Equilibrium: values and behavior – Analysis:welfare, inheritance CS on a policy (direct democracy) – Andreoni, Bowles and Gintis, Tabellini, …

13. A promising venue for NIE? Socializing agents Socialized agents Policy-makers

14. Socializing agents Choice of socializing behavior – benefit (own+ socialized agent), cost Exogenous: – Others’ values (altruism, revenge) – ‘Formal’ institution Equilibrium values & soc. Beh.

15. Socialized agents Behavioral choices – Trade-off between values and other sources of motivation – Exogenous: values, formal institutions, … Equilibrium: behavior Special case: socializing agents = socialized

16. Policy-maker Choosing economic policies/institutions – Preferences over outcomes – Values (ignore for simplicity) Exogenous: others’ values, etc.. Policy/institutions can influence values – Indirectly:impact socialization processes – Directly: socializing organizations, force

17. Systemic analysis (eq.) Values, behavior, eco. institutions, policy Politics - the process of achieving a pol. goal – Values imply constraints and opportunities Political institutions (endogenous policy- maker) – equilibria in the relations between the policy- makers and economic agents, given values

18. Concerns The right or important origin of values? Analytically tractable? – Too complicated?

19. Concerns Unobserved? But so is the invisible hand, transaction costs, opportunity costs, shadow prices, preferences, …

20. Is it useful? Even using informal partial eq. analyses → new insights – ‘Formal, informal’ relations, inst. change – institutional foundations of markets, optimal property rights, politics, institutional change as a moral crisis, …. What follows provides some examples

21. Values and market failure Fail w/o ‘anti-trade’ norms Even if reciprocators Imperfect monitoring → disputes may occur → revenge (lawlessness) If expected cost from revenge > gain from exchange →market failure

22. Implications? Code of conduct (‘law’) – Reducing uncertainty in interpretation Conduct-certifying organizations (‘legal system’) – Improves monitoring – Justifying non-violence Legal system – Punishing: satisfy the ‘revenge constraint’ /allow trade – Deterring ‘private justice.’ – History: from revenge to legal compensation. Policy? Interests of the policy-maker?

23. Market failure: limited commitment Asy. Info -- altruistic (honest) type Too few → no exchange Socializing organizations → ‘more,’ pooling

24. Value-based market failure: limited commitment Some agents are reciprocators, some are not Unraveling → market failure Legal sanction → preventing unraveling – Direct and indirect impact (on socializations) – If indirect, time consuming transition – Higher return from concentrated legal invest.?

25. Property Rights Allocations Example: – Homeless newspapers Altruism → identity matters for non- economic reasons Wedge between the socially optimal and the economically efficient property rights Higher contribution and higher eq. value. Value to policy to values/static-dynamic eff.

26. Values constrain policy Legitimacy meta-norms: whose rules are normatively binding, and with respect to what. Examples – 65mph rule – Prohibition (1920-1933) – Muslim world Either case, two equilibria

27. Values constrain on policy

28. Values provide opportunities: Politics Framing – ‘Your seatbelt is their security’ (1970) – Social Security: Insurance or welfare? Leadership ‘Path of least normative resistance’ – Luther King Jr. versus Malcolm X Beyond the model.

29. Values influence on politics Distinct legitimacy norms – West: Representation & Corporations – Muslim ME: Religious authorities The essence of politics – Interest groups representing corporate entities – Co-opting the religious authorities

30. Institutional change ? Comparative Statics Institutions have normative foundations Manifestation: investment in institutional ‘moral basis’ – Seatbelt laws, don’t drink and drive laws, … – The Dissolution of the Monasteries (1534)

31. Institutional change as a moral crisis Incompatibility between institutions and their normative foundations → changes Institutional change ? Either – Same outcomes (behavior), but followed for reasons other than values Social security: values, elderly voters – Same motivation (value), another outcome (no 65mph speed limit) Power matters

32. Why incompatibility? Power corrupts → ‘immoral’ behavior/rules – The Reformation, 1517-1648 and its essence – Power? Nobles & the power of the print Abuse of the system – UK‘s ‘rotten borough,’ 1832 Reform Act – Power of the rising cities Exogenous normative change – Slavery. Power: Parliamentary legislation. – Endogenous? parametric shift influencing socialization

33. Concluding comments A conceptual framework / issues Some examples of how it can contribute to integrating values in institutional analysis At the least, food for thought. Is it a promising way to proceed? The way forward?