Explaining Institutional Change: On the Interplay between internal and external institutions

1. Explaining Institutional Change:On the Interplay between internal and external institutions Stefan Voigt Philipps-University Marburg This is work in progress – any suggestions are most welcome!

2. Explaining Institutional Change: on the interplay between internal and external institutions I. Introduction • „Institutions matter“ has become commonplace  Change institutions in order to induce additional growth  Resistance to reform by powerful groups • Conjecture here: changes in formal institutions only with beneficial effects if factually enforced. Factual enforcement depends, in turn, on corresponding internal institutions. • Implications: • Societies are severely restricted in their choice of institutions; • Not a single set of universal „best“ institutions Voigt: Institutional Change

3. I. Introduction (2) • Structure of the Talk: • Defining Institutions and Institutional Change • A Simple Model • Potentially Relevant Factors for Factual Enforcement of External Institutions • How to Take the Conjecture to an Empirical Test • Conclusions and Outlook Voigt: Institutional Change

4. II. Defining Institutions and Institutional Change Some Definitions First: • Institutions := commonly known rules used to structure recurrent interaction situations that are endowed with a sanctioning mechanism • Depending on the kind of enforcement, we propose to distinguish between external and internal institutions: • Enforcement by state : „external institutions“ • Enforcement from within society: „internal institutions“ • A more fine-grained taxonomy of internal institutions could look like this: Voigt: Institutional Change

5. II. Defining Institutions (2) A Taxonomy of Institutions Voigt: Institutional Change

6. II. Defining Institutions (3) • Whereas external institutions can be changed overnight, internal institutions are usually exempt from deliberate modification • The relationship between internal and external institutions can be • Neutral, • Complementary, • Substitutive or • Conflicting. • A conflicting relationship can endanger the factual enforcement of formal external institutions. Voigt: Institutional Change

7. III. A Simple Model • Condition for effective external institutions: those who are to implement them cannot make themselves better off by reneging • Precondition: capacity of population to act collectively in order to produce the public good opposition • A society composed of 3 actors one of whom with a comparative advantage in violence: G, 1, 2 • Joint opposition by 1 and 2 leads to ousting of G • Status Quo: no effective constitution • Two possible constitutional rules R1 and R2 are discussed: R1 reduces government action to minimum, R2 gives government power to redistribute. • If R1 is effectively enforced, a higher output results compared to an effectively enforced R2 but R1 would entail a more unequal distribution • Question: are both constitutions effectively enforceable? Voigt: Institutional Change

8. payoff toplayer 2 R1 8 6 4 R2 2 SQ 2 4 6 8 payoff toplayer 1 III. A Simple Model (2) In other words: does likelihood of successful opposition depend on rule chosen?Opposition is costly Voigt: Institutional Change

9. Opposition Opposition 2 2 Opposition Opposition No Opp. No Opp. 1 1 Reneges Reneges Opposition Opposition No Opp. No Opp. G G 2 2 Complies Complies No Opp. No Opp. R1 R2 Voigt: Institutional Change

10. Opposition Opposition 2 2 Opposition Opposition No Opp. No Opp. 1 1 Reneges Reneges Opposition Opposition No Opp. No Opp. G G 2 2 Complies Complies No Opp. No Opp. R1 R2 Voigt: Institutional Change

11. III. A Simple Model (3) • Both (opposition, opposition) and (not oppose, not oppose) can be equilibria in pure strategies. • Conjecture: beliefs and internal institutions can serve as equilibrium selection devices. Voigt: Institutional Change

12. IV. Potentially Relevant Factors for Factual Enforcement Beliefs • Individualist Beliefs? • Fatalism • Organicist state conception • The Concept of the Constitution • Legally enforceable document vs. Book of hopes • Problem: concept could be endogenous to the constitution • Trust • Stag-hunt • Problem: trust also endogenous Voigt: Institutional Change

13. IV. Potentially Relevant Factors for Factual Enforcement (2) Internal Institutions • Norms • Utility function with additional argument, namely utility from norm-compliance • E.g. solidarity norm aiming at equal distribution of wealth • Likelihood of opposition larger under R2 than under R1  R2with higher chance of becoming effective than R1 Voigt: Institutional Change

14. IV. Potentially Relevant Factors for Factual Enforcement (3) Internal Institutions • The Problem of Collective Action • n >> 3 • G can now discriminate between subjects (and secure additional income via rent-seeking payments) • Organized interest groups might assume important role (as they have already solved the problem of collecive action) • Conjecture: chances of factual enforcement are higher if there are a substantial number of manifest interest groups with heterogeneous interests that command considerable threat potential. • Trigger strategies as internal institutions? Voigt: Institutional Change

15. V. Towards an Empirical Test • Huge problems! • Namely: • Translate factors developed in IV into testable hypotheses; • Find adequate proxies for both dependent and independent variables; • Adequately deal with endogeneity problems; • Adequately deal with multicollinearity. Voigt: Institutional Change

16. VI. Conclusion and Outlook • Societies have no carte blanche in choosing their institutions • Important insight for policy advisors • Follow up questions: • What role do the procedures used to choose constitutions play? • What role do organized interest groups play in this game? Voigt: Institutional Change

17. In the words of de Tocqueville: • These three great causes serve, no doubt to regulate and direct American democracy; but if they were to be classed in their proper order, I should say that physical circumstances are less efficient than the laws, and the laws infinitely less so than the customs of the people. I am convinced that the most advantageous situation and the best possible laws cannot maintain a constitution in spite of the customs of a country; while the latter may turn to some advantage the most unfavorable positions and the worst laws. (Democracy in America, vol. I, Chapter XVII) Voigt: Institutional Change

18. Thank you for your attention! Voigt: Institutional Change