Chapter 16: Endogenizing institutions and institutional changes
∗ MASAHIKO AOKI Stanford University Abstract: This paper proposes an analytical-cum-conceptual framework for understanding the nature of institutions as well as their changes. First, it proposes a new deﬁnition of institution based on the notion of common knowledge regarding self-sustaining features of social interactions with a hope to integrate various disciplinary approaches to institutions and their changes. Second, it speciﬁes some generic mechanisms of institutional coherence and change – overlapping social embeddedness, Schumpeterian innovation in bundling games, and dynamic institutional complementarities – useful for understanding the dynamic interactions of economic, political, social, organizational, and cognitive factors. 1. Introduction A consensus seems to have emerged among economists, as well as among other social scientists, that ‘institutions matter’ for understanding the differences in economic performances among various economies over time and space (e.g., Nelson and Sampat, 2001; the World Bank, 2002). But, if institutions are nothing more than codiﬁed laws, ﬁats, organizations, and other such deliberate human devices, why can’t badly performing economies design (emulate) ‘good’ institutions and implement them? This question would naturally lead us to a more fundamental, ontological question of what institutions are. Institutions are customarily identiﬁed with the ‘rules of the game’ by economists and others (e.g., North, 1990: 5). However, within this thrust, their nature, origin, and relevance to economic analysis are seemingly treated in two different ways. One treats various institutions as rules in a hierarchical order. According to this view, there are rules exogenously pre-determined outside the domain of economic transactions, such as legal...
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