Discussion of the Paper "Endogeneizing Institutions and Institutional Change", by Masahiko Aoki

Motivation Argument Conclusions References
Discussion
Endogeneizing Institutions and Institutional Change
by Masahiko Aoki
Journal of Institutional Economics, v.3, n.1, Apr.2007, p.1-31
Matheus Albergaria de Magalhães
Economia das Organizações II
Fundamentos Econômicos da Estratégia (20151)
Universidade de São Paulo (USP)
May 13th, 2015
Endogenizing Institutions and Institutional Change (Aoki 2007)

SECTIONS
Motivation
Argument
Conclusions
References

MOTIVATION
Institutions: humanly devised constraints that structure
human interaction ("rules of the game") (North 1990, 1991, 1994).
Fact: Institutions matter.
Kickoff: let’s look at a few examples.

MOTIVATION
Figure 1
Satelitte Night Images: North and South Korea
Source: Google Images.

MOTIVATION
Figure 2
Legal Origins: World
Source: La Porta et al.(2008, p.289).

MOTIVATION
Figure 3
Corruption: Unpaid Parking Tickets, U.N. Diplomats
Source: Fisman & Miguel (2007).

MOTIVATION
Figure 4
Bureaucratic Efﬁciency and GDP Per Capita: World
Source: Mauro (1995).

MOTIVATION
Figure 5
Time to Start a Business: Selected Countries
Source: Filártiga (2007, p.133).

MOTIVATION
Figure 6
Settlers’ Mortality Rates and GDP per Capita: Selected Countries
Source: Acemoglu et al. (2001).

MOTIVATION
What is the Main Question?
There are at least two questions:
1. Can we ﬁnd a new deﬁnition of institutions that may help
integrating various disciplinary conceptualizations of the
term?
2. Are game-theoretic mechanisms useful for understanding
institutional change?

MOTIVATION
Why are these questions important?
Institutions ("rules of the game") treated in two distinct ways:
1. Rules in a hierarchical order ("exogenous view").
2. Institutionalized rules seem as endogenously shaped and
sustained in the repeated operational plays of the game
("endogenous view").
Author will try to examine how these two views deal with the
phenomenon of institutional change.

ARGUMENT
How does the author plan to go about providing an answer?
Roadmap:
1. Game-theoretic characterization of the two views.
2. Incorporation of Bounded Rationality in the Endogenous
View.
3. Four prototypes of the Domain of the Game (Social Norm;
Political State; Economic Contracts; Organizational Structure) and
their linkages.
4. Dynamic considerations.

ARGUMENT
Aoki (2007) employs the concept of game-form to pinpoint
differences in the "exogenous"and "endogenous"views.
Two insights:
1. Institution seem as a game-form.
2. Institution as an endogenous equilibrium outcome of the
game.

ARGUMENT
New deﬁnition of an institution:
"An institution is self-sustaining, salient patterns of social interactions, as
represented by meaningful rules that every agent knows and incorporated as
agents’ shared beliefs about the ways how the game is to be played.”
(Aoki, 2007, p.7).

ARGUMENT
Figure 7
Dualities of Institutions
Source: Aoki (2007, p.10).

ARGUMENT
More Insights:
Implications in an institution: summary representation
(rules cum beliefs) regarding the endogenous nature of
game-state.
Wide differences and variety in how players deal with
information sets (no need for perfect information).
Each player cannot know the choices of all other players in
their entirety.
Rule and associated beliefs need to be continually
reconﬁrmed and reproduced through relevant strategic play
of players.

ARGUMENT
Four Prototypes of the Domain:
1. Economic Exchange Domain: transactions of private goods.
2. Organizational Exchange Domain: player of the game in
an economic domain or an institution in the domain of
work collaboration.
3. Political Exchange Domain: two types of agents
(government and multiple private agents).
4. Social Exchange Domain: social symbols that directly
affect the payoffs of players are unilaterally delivered and/or
exchanged with "unspeciﬁed obligations to reciprocate".

ARGUMENT
Institutional Linkages:
Linked Games: players coordinate their choices of
strategies across more than one domain so as to gain more
payoffs than the sum of payoffs that could be possible
from playing in each separate domain.
Examples: Common Pool Resources (Ostrom, 1999; 2000; 2010)
and Worker Discipline Devices (Ellingsen & Johannesson, 2007)

ARGUMENT
Institutional Linkages:
Institutional Complementarities: even if agents do not
consciously coordinate their own choices across domains,
they regard an institution in another domain as a parameter
and accordingly choose strategies.
Powerful analytical tool: (i) it explains variety of overall
institutional arrangements across economies; (ii) it is not
conditional on consensus among agents.

ARGUMENT
Question: how do boundedly rational agents change
institutions?
Institutional change may be characterized by a quantum
shift in the equilibrium constellation of agents’ strategies.
This change can generate (and be induced by) changes in
agents’ shared behavioral beliefs.
Bounded rationality plays an essential role in the process.
Cumulative consequences of repeated plays may generate
internal inconsistencies.

ARGUMENT
Dynamics: three mechanisms of cross-domain institutional
change
Schumpeterian Innovation in bundling.
Social Embededdedness encompassing sequentially arising
domains.
Dynamic Institutional Complementarities.

CONCLUSIONS
Main goal of the paper: propose a uniﬁed, analytical and
conceptual framework for understanding the roles of social,
political, economic and organational factors and their
interdependencies in the process of institutional change.
Conclusion: institutions in the past and in the future are
mutually interlinked in a complex manner
("history matters", as well as "institutions matter").

CONCLUSIONS
My Impressions:
Inovative attempt to explain institutions and institutional
change (North, 1990, 1991, 1994; Nelson & Sampat, 2001) based on
Game Theory and Mechanism Design concepts (Maskin,
2007; Myerson, 2007).
Possibility of integration among distinct disciplines
(economics, history, sociology, etc.).
Clear interface with the insights of authors like Coleman
(1990) and Ostrom (2000).
Challenge: integrate new theoretical insights with better
empirical measures related to the concepts of institutions
and institutional change.

REFERENCES
Acemoglu, D., Johnson, S., Robinson, J. A. (2001). The colonial origins of
comparative development: an empirical investigation. American Economic
Review.
http://doi.org/10.1257/aer.91.5.1369.
Coleman, J.S. (1990). Foundations of social theory. Cambridge: Harvard
University.
Ellingsen, T., Johannesson, M. (2007). Paying respect. Journal of Economic
Perspectives, 21(4), 135–149.
http://doi.org/10.1257/jep.21.4.135.
Filártiga, G. B. (2007). Custos de transação, instituições e a cultura da
informalidade no Brasil. Revista do Bndes, 14(28), 121–144.
Fisman, R., Miguel, E. (2007). Corruption, norms, and legal enforcement:
evidence from diplomatic parking tickets. Journal of Political Economy, 115(6),
1020–1048.
http://doi.org/10.1086/527495.

REFERENCES
La Porta, R., Lopez-de-Sillanes, F., Shleifer, A. (2008). The economic
consequences of legal origins. Journal of Economic Literature, 46(2), 285–332.
http://doi.org/10.1257/jel.46.2.285.
Maskin, E. (2007). Mechanism Design Theory: how to implement social
goals. Nobel Lecture. Retrieved from
http://www.nobelprize.org/nobelprizes/economic −
sciences/laureates/2007/maskin − slides.pdf.
Mauro, P. (1995). Corruption and growth. Quarterly Journal of Economics,
110(3), 681–712..
Myerson, R. B. (2007). Perspectives on mechanism design in economic theory.
Nobel Lecture. Retrieved from
http://www.nobelprize.org/nobelprizes/economic −
sciences/laureates/2007/myerson − slides.pdf.

REFERENCES
Nelson, R.R., & Sampat, B.N. (2001). Making sense of institutions as a factor
shaping economic performance. Journal of Economic Behavior and Organization,
44(1), 31–54.
http://doi.org/10.1016/S0167-2681(00)00152-9.
North, D.C. (1990). Institutions, institutional change and economic performance.
Cambridge: Cambridge University.
North, D.C. (1991). Institutions. Journal of Economic Perspectives, 5(1), 97–112.
http://doi.org/10.1257/jep.5.1.97.
North, D.C. (1994). Economic performance through time. The American
Economic Review, 84(3), 359–368.

REFERENCES
Ostrom, E. (1999). Coping with tragedies of the commons. Annual Review of
Political Science, 2(1), 493–535.
http://doi.org/10.1146/annurev.polisci.2.1.493.
Ostrom, E. (2000). Collective action and evolution of social norms. Journal of
Economic Perspectives, 14(3), 137–158..
Ostrom, E. (2010). Beyond markets and states: polycentric governance of
complex economic systems. American Economic Review, 100(3), 641–672.
http://doi.org/10.1257/aer.100.3.1.

Thank You
matheus.albergaria.magalhaes@gmail.com
http://www.sites.google.com/site/malbergariademagalhaes

Discussion of the Paper "Endogeneizing Institutions and Institutional Change", by Masahiko Aoki

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