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Aligica & Tarko - Institutional resilience and economic systems



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Aligica & Tarko - Institutional resilience and economic systems

  1. 1. Institutional Resilience and Economic Systems Dragos Paul Aligica Vlad Tarko George Mason University, Mercatus Center Association of Private Enterprise Education 2013
  2. 2. Outline • What is resilience? • The role of institutions • Highly Optimized Tolerance • Resilience by adaptability • Polycentricity as the framework for adaptability
  3. 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. 4. The role of institutions • Innovation is endogenous • Non-renewable & non-abundant resources – The Red Queen metaphor
  5. 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. 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. 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. 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. 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