1. Institutional Resilience and
Economic Systems
Dragos Paul Aligica
Vlad Tarko
George Mason University, Mercatus Center
Association of Private Enterprise Education 2013

2. Outline
• What is resilience?
• The role of institutions
• Highly Optimized Tolerance
• Resilience by adaptability
• Polycentricity as the framework for
adaptability

3. Resilience
• Institutional resilience is the ability of a
social system (society, community,
organization) to
– react and adapt to abrupt challenges (internal
or external) and/or
– avoid gradually drifting along destructive
slippery slopes.

4. The role of institutions
• Innovation is endogenous
• Non-renewable & non-abundant resources
– The Red Queen metaphor

5. Highly Optimized Tolerance
• Experience & Data -> estimations of risk
• Efficient prevention:
– Allocate resources for prevention based on
expected damage
– The system of rules gets more complex
– Vulnerabilities to uncertainty, unexpected
sources of damage

6. Resilience by adaptability
• Ability to react to new challenges, rather
than predict them
• Why systems fail? Monitoring and
enforcement problems:
– Incentive problems
– Knowledge problems:

7. Institutional complexity
• Ostrom (2008):
– “Given the logic of combinatorics, it is
impossible for public officials or for direct
beneficiaries to conduct a complete analysis of
the expected personal benefits or broader
performance of all of the potential rule
changes that could be made by the individuals
served by a self-organized resource
governance system trying to improve its
performance. A similar impossibility also
exists for biological systems – they evolve.”

8. Causes of institutional failure
• Constanza, Low, Ostrom and Wilson
(2001) :
– Missing Institutions
– Scale Mismatches
• Missing Connections: decision making linkages
between scales are ineffective.
• Incorrect Scale of Information: decisions are
based on information aggregated at the wrong
scale, even though information may exist at the
appropriate scale.

9. Polycentricity
• Multiple independent decision centers
– Competing at the same scale
– Different functions at different scales
• Over-arching system of rules:
– Domains of universality
– Domains of acceptable variance and diversity
• Good system of rules:
– Spontaneous order