Norms and Institution Formation

38 Pages Posted: 11 Jun 2008

See all articles by Patrick Francois

Patrick Francois

University of British Columbia (UBC) - Department of Economics

Date Written: March 2008

Abstract

This paper analyzes the dynamic interaction between norms - internalized restraints on opportunistic behaviour - and institutions - restraints on such behaviour deriving from external enforcement. When individuals following a norm suffer pecuniary losses to doing so, the norm is eroded. Institutions, on the other hand, are strengthened when institution designers are rewarded for improving them. The dynamic interaction between these two factors leads to both good steady states with functioning institutions, widespread norm compliance, and trade, and bad steady states where trade breaks down, institutions are dysfunctional and beneficial norms are violated. The model here shows the situations that lead economies to converge on good steady states rather than bad ones; why countries with a history of institutional success are more likely to be successful in future, why countries with a history of failure will require better institutions to achieve even the same level of compliance, and why functional institutions may not be readily transplated from successful to unsuccessful countries.

Keywords: Economic Development, Institutional Change, Social Norms

JEL Classification: O17, O43, Z10

Suggested Citation

Francois, Patrick, Norms and Institution Formation (March 2008). CEPR Discussion Paper No. DP6735, Available at SSRN: https://ssrn.com/abstract=1141641

Patrick Francois (Contact Author)

University of British Columbia (UBC) - Department of Economics ( email )

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Vancouver, BC V6T 1Z1
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