Aligica & Tarko - Institutional resilience and economic systems
Institutional Resilience andEconomic SystemsDragos Paul AligicaVlad TarkoGeorge Mason University, Mercatus CenterAssociation of Private Enterprise Education 2013
Outline• What is resilience?• The role of institutions• Highly Optimized Tolerance• Resilience by adaptability• Polycentricity as the framework foradaptability
Resilience• Institutional resilience is the ability of asocial system (society, community,organization) to– react and adapt to abrupt challenges (internalor external) and/or– avoid gradually drifting along destructiveslippery slopes.
The role of institutions• Innovation is endogenous• Non-renewable & non-abundant resources– The Red Queen metaphor
Highly Optimized Tolerance• Experience & Data -> estimations of risk• Efficient prevention:– Allocate resources for prevention based onexpected damage– The system of rules gets more complex– Vulnerabilities to uncertainty, unexpectedsources of damage
Resilience by adaptability• Ability to react to new challenges, ratherthan predict them• Why systems fail? Monitoring andenforcement problems:– Incentive problems– Knowledge problems:
Institutional complexity• Ostrom (2008):– “Given the logic of combinatorics, it isimpossible for public officials or for directbeneficiaries to conduct a complete analysis ofthe expected personal benefits or broaderperformance of all of the potential rulechanges that could be made by the individualsserved by a self-organized resourcegovernance system trying to improve itsperformance. A similar impossibility alsoexists for biological systems – they evolve.”
Causes of institutional failure• Constanza, Low, Ostrom and Wilson(2001) :– Missing Institutions– Scale Mismatches• Missing Connections: decision making linkagesbetween scales are ineffective.• Incorrect Scale of Information: decisions arebased on information aggregated at the wrongscale, even though information may exist at theappropriate scale.
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