Institutions: Rules or Equilibria?

In recent years, the interest in rational choice analysis of institutions has received substantial impetus from an accumulating body of evidence demonstrating the importance of a society’s institutions in determining its economic outcomes. Econometric studies have uncovered correlations between institutional variables such as the security of property rights, the rule of law, and trust, and economic and political outcomes including levels of production, saving, and corruption. Historical studies have revealed the role that institutions played in long-run trajectories of industrial and commercial development. Studies of the developing world and of countries transitioning from socialism have revealed the challenges involved in creating wellfunctioning institutions, the benefits that can be obtained when institutional change and economic reform are successful, and the dangers that ensue when they are not. Stimulated by these developments, the conceptual frameworks employed by scholars studying institutions have also been evolving, as old frameworks have been adapted and new frameworks have emerged to explore old and new questions about how institutions function, how they change, and how they affect economic behavior and outcomes. The rational-choice approach to institutional analysis does not require us to assume that people are always ‘rational’, or that institutions are chosen rationally. Rather, it holds that a rational-choice perspective enables us to generate a theory with empirically refutable predictions about the institutions that can prevail in a given situation.