The Changing Determinants of Economic Performance in the World Economy
Chapter 12: Institutional framework
The world of neoclassical economics is characterized by atomistic competition, perfect information and no economic uncertainty. This abstract world neglects institutions that facilitate efficient transactions and production in real economic systems. Institutions play this important role by reducing the bounded rationality, opportunism and uncertainty which characterize complex economic systems (Commons 1970; North 1990; Hechter 1990; Whitley 1992a, 1992b). This chapter analyzes the nature and evolution of institutions as well as their influence on economic competitiveness and growth. 1 NATURE AND EVOLUTION OF INSTITUTIONAL FRAMEWORK The word ‘institution’ has different meanings for different persons. In his Economic Institutions of Capitalism, Oliver Williamson defined institutions as alternative organizational mechanisms: markets, hybrids and hierarchies (Williamson 1985). John R. Common viewed institutions as established societal organizations, or ‘going concerns’, which included inter alia universities, labor unions, churches, political parties and the government (Commons 1970, p. 129). Hechter, in turn, used a more indirect definition by arguing that ‘the existence of social institutions . . . [is] . . . revealed by the appearance of some regularity in collective behavior’ (Hechter 1990). In this study we adopt Douglass North’s (1990) definition which includes three major elements that shape the political, economic and social interaction of economic agents: informal behavioral constraints and incentives (values, customs, traditions etc.), formal rules (constitutions, laws, regulations and contracts) and their enforcement (North 1990).1 Culturally embedded values, norms, traditions, conventions, customs, sanctions, taboos and codes of conduct form the informal institutional constraints and incentives that shape human and organizational behavior. Informal institutions provide human actors with...
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