2. Institutions and Institutional Theory-
Significance of Institutions
Definition of Institutions
Characteristics of Institutions
Typology of Institutions
Rational-choice and Normative
3. Institutions and Institutional Theory
In recent years scholars and policy makers alike
have paid increasing attention to the complex
relationship between institutions and economic
There is widespread consensus that institutions
matter crucially for development.
The institutional settings within which economic
policies are formulated are of crucial significance
For Acemoglu (2005), differences in economic
institutions are the fundamental causes of
differences in economic development.
Institutions are the rules of the game in a society.
More formally they are the limitations to free
behaviours imposed on the individuals by the
4. Institutions and Institutional Theory
Rodrik(2000) presented one of the most through analyses of the
role of institutions in the process of economic growth.
The analyses take takes into account the roles of property rights,
regulatory institutions, institutions for macroeconomic
stabilization, institutions for social insurance and institutions of
Lane and Tornell (1996), observed that many countries that are
rich in natural resources such as Nigeria, Trinidad and Venezuela
have done poorly in terms of economic growth
In the absence of well-defined and protected property rights,
natural resources can be exploited by a number of powerful
Poor countries tend to have unreliable of legal systems, corrupt
government and insecure property rights.
Where institutions are poor, entrepreneurs succeed on the basis
of political rather than economic criteria: inefficient entrepreneurs
survive who happen to have the personal ties with state officials
that are necessary to protect against expropriation (Keefer and
5. Institutions and Institutional Theory-
Politics, profoundly by rules, steers political
behaviour in different directions.
Since the 1980s, political scientists have
developed a renewed interest in the study of
political institutions based on the assumption that
a set of constitutional-legal rules and structural
arrangements within which politics take place (as
well as informal institutions) are crucial
determinants of the shape of politics and policy
outcomes (Lijphart 2002).
For others, institutions are rules or norms by
which people live either abiding or breaching them
6. Institutions and Institutional Theory-
Most political actions of real consequence occur in
institutions. Therefore, it is crucial to understand
how these bodies act and how they influence the
behavior of individuals working within them (Peter
A generation of work has shown that institutions
affect various political outcomes. For instance,
numerous scholars have shown that electoral
systems shape the behaviors of parties,
candidates and voters
Other scholars have demonstrated that different
constitutional structures such as presidential or
parliamentary systems affect regime stability,
7. What is Institution?
Institution is a slippery term, which means
different things to different authors.
For Olsen (1992:7), an institution is the bearer of
a set of practices, a structural arrangement and a
configuration of rules, which determines what is
Institutions are devised by individuals (micro-
level) but in turn constrain their actions.
They are part of the broad social fabric (macro-
level) but also the conduit through which day-to-
day decisions are actions are taken. Hence,
institution is a meso-level concept.
8. What is Institution?
Institutions can be formal or informal.
Formal institutions are normally established and
constituted by binding laws, regulations and legal
orders which prescribe what may or may not be.
Informal institutions on the other hand are
constituted by conventions, norms, values and
accepted ways of doing things, whether,
economic, political or social.
These are embedded in traditional social
practices and culture which can be equally
binding (Leftwich 2006).
The most significant element of an institution.
Structure may be either formal (legislature, bureaucracy,
political parties, mass-media) or informal (a network of
interacting organizations or a set of shared norms).
Institutionalism provides no place for individuals and their
Rather it involves groups of individuals in some sort of
patterned interactions that is predictable based upon
specified relationships among the actors.
The existence of some sort of stability over time.
Some legislator may decide to meet in a committee
meeting once in a room in the parliament house. That could
be very pleasant but it would not be an institution.
If they agree to meet routinely after a specific period of time
at the same place, that would begin to take on the shape of
10. Institutions-Characteristics (contd.)
Regulatorof individual behavior
Institutions must in some way (formal/informal) constrain
the behavior of its members. If we resume with the trivial
instance of the committee meeting above, it may not be
considered as an institution if the members do not attach
importance and obligation to attend the meeting.
There should be some sense of shared values and
meaning among the members of the institution. This view is
central to the normative institutionalism of March and Olsen
Institutions involve legitimacy beyond the preference of
individual actors. They are valued in themselves and not
simply for their immediate purposes and outputs.
Institution’s stability of over time may contribute to gain this
legitimacy (Lowndes: 1996:182).
11. Typology of institutionalism
There are at least seven versions of ´new
institutionalism` currently in use (Peters 1999).
Rational choice institutionalism,
Sociological institutionalism and
Institution of mediation.
Historical growth of a particular Organization is
crucial in identifying the degree of
Institutional history enables us understand both the
origin of an institution and the paths by which it has
developed (Berman 1983).
Each institution has its own history; its own time-
dependent line of development and how a social
system develops, operates and affects its structure
and capacities for action (Scott 1995).
Institutionalization is something that happens to an
Organisation over time, reflecting the
Organisation’s own distinctive history, the people
who have been in it, the groups it incorporates and
the vested interests they have created and the way
it has coped with the environment (Selznick 1957).
Historical institutionalists see institutions as
As they point out, institutions are meant to be
Indeed, the emphasis on path dependence is another
way of saying that the transaction costs of doing things
differently is almost always prohibitively high, although
dire conditions may reduce the marginal costs of
But if institutions are about preservation, politics is
about manipulation and leadership is about overturning
Exiting leaders want to harden their preferences
through institutions; new leaders often want to
extirpate the past.
The consequence is that institutions may be
designed to fail. Given uncertainty about future
political control, majorities may prefer to hedge
their bets (Tsebelis 1990) or even prefer to design
ineffective institutions than risk having their
creations used against them .
Institutions, of course, are constituted at many
levels. They may be constitutional; they may be
procedural; and they may be programmatic—for
Clearly, in any conception of institutions, the cost
of change whether formal or non-formal and
whether financial or organizational must be part
of what an institution confers.
Equally, the political costs of trying to disturb the
status quo are far greater where the struggle
involves many actors with diverse preferences
rather than only a few with homogeneous
So, any system that makes decision-making
difficult tends toward the preservation of existing
The US Congress became what it is today through an
evolution of some two hundred years. The British
parliament took its current shape after a much longer
evolutionary period than the US Congress.
Institutions rely upon the logic of persistence or path
dependency and once launched on that path they
continue along until some sufficiently strong
social/political force deflects them from it (Krasner
Trends requires not only changing structures but also
the prevailing mind-set about what the institution
Further, public institutions once created tend to have
structural relationships with society and with powerful
For HI, what is mainly of interest is the
construction, maintenance and adaptation of
The emphasis of historical Institutionalism is much
more on the persistence of organizations after they
are formed than it is on the facts of their initial
To some extent the emphasis on embodying ideas
in the structures that support institutions may be
taken as a definition of the formation of institution.
It can be argued that when an idea becomes
accepted and it is embodied into the structural
What"may'"'be'''more' ‘important for the question of
formation in the historical institutionalism is the
definition of when that creation occurs.
The choice of the relevant date from which to
count future developments will be crucial for
making the case that those initial patterns will
persist and shape subsequent policies in the policy
For example, when King (1995) was considering
the development of welfare politics in the United
States and the United Kingdom he began the
analysis from the passage of major pieces of
The question of what is a defining event, or what
changes are incremental and what changes are
fundamental, is a familiar one. Dempster and
Wildavsky (1980), for example, ask the simple
question of what constitutes an increment, as opposed
to a more fundamental shift in policy or a budget.
The familiarity of this question, however, does not
make it any easier to resolve. For purposes of
understanding historical institutionalism, the question
becomes whether the movement away from a
presumed equilibrium position occurs by evolution or
Both types of change occur, but accepting the
Historical institutionalism has treated change through
the concept of 'punctuated equilibria' (Krasner, 1984).
For most of its existence, an institution will exist in an
equilibrium state, functioning in accordance with the
decisions made at its initiation, or perhaps those made
at the previous point of 'punctuation.‘ These policy
equilibria are not, however, necessarily permanent and
institutions are considered capable of change within the
context of the approach.
when a major institutional (evolutionary) change does
occur then, after the fact, it can be argued that there
was a sufficient force available to produce a movement
away from the equilibrium and inertia affecting an
The model states that policy generally changes only
incrementally due to several restraints, namely the
"stickiness" of institutional cultures, vested interests, and
the bounded rationality of individual decision-makers.
Policy change will thus be punctuated by changes in these
conditions, especially in party control of government, or
changes in public opinion. Thus policy is characterized by
long periods of stability, punctuated by large—though less
frequent—changes due to large shifts in society or
Gun control and U.S. federal tobacco policy have also been
found to follow punctuated changes. A recent study by
Michael Givel found that despite a significant mobilization to
change state tobacco policy, U.S. state tobacco
policymaking from 1990 to 2003 was not characterized by
punctuated policy change, which also favored the pro-
Rational Choice Institutionalism
Rational choice institutionalism assume that
individuals are instrumentally persuaded to
maximize their utility.
Rational-choice institutionalists think of
institutions as a system of rules and incentives.
This theory permit, prescribe and proscribe rules
that is designed to constrain behaviour.
For rational choice theorists, institutions are
easily changeable: if correct set or rules or the
correct payoff matrix is selected then the desired
outcome can be engineered.
Rational Choice Institutionalism
Still, a more prevalent view of institutions as rules—
derived from economic models of cooperation—
suggests that institutions may be the product of
agreements that are Pareto optimal—that is, one party
is made better off, but no one is made worse off.
Log rolls, reciprocities, mutual advantages also
produce new institutional arrangements. And there is a
reciprocal relationship here; that is, institutions of
certain forms, particularly ones that fragment power
and provide multiple veto points, are likely to induce
log rolling, reciprocities, and mutual back scratching.
Such conditions make coherent change or direction
and central leadership less likely, all things equal,
though hardly impossible.
Rational Choice Institutionalism
Inevitably, institutions advantage some in the short
term and disadvantage others, but the long run
may be a different story.
The same rules and structures may, over longer
stretches of time, provide advantages or
disadvantages to different interests, indeed even
reversing which interests are advantaged or
The so-called filibuster rule of the US Senate,
ironically the product of an effort to create greater
institutional efficiencies by deterring tiny minorities
from tying up the Senate indefinitely, clearly helps
concerted and substantial minorities and frustrates
Rational Choice Institutionalism
Rational choice theory depends for its analytical
power upon the utility-maximizing decisions of
Institutions are conceptualized as collections of
rules and incentives that establish the conditions
for bounded rationality, and therefore establish a
'political space' within which many interdependent
political actors can function.
Thus, in these models, the individual politician is
expected to maneuver to maximize personal
utilities, but his or her options are inherently
constrained because they are operating within the
Rational Choice Institutionalism
Individuals and institutions interact to create
The argument is even if individuals may become
involved with an institution, including one such as
the market that is assumed to be favorable to
individual utility maximization, they must quickly
learn more accommodative norms and accept
institutional values if they are to be successful in
those institutions (North, 1990).
A set of rules can arise within organizations that
structures behavior and establishes the bounds of
acceptability. Further, the existence of those rules
ultimately benefits all participants, and perhaps
Rational Choice Institutionalism
Institutions are capable of producing some
predictability and regularity of outcomes that
benefits all participants in an institution, and also
clarifies the probable range of decisions available
to societal actors not directly involved in the
process of any particular organization.
Thus, businesses may benefit from a regulatory
regime established by government, even though
they may complain about some of its particular
Rational Choice Institutionalism
The theory posits that there is a problem of
ensuring that organizations, as well as individual
bureaucrats, will comply with the wishes of political
The basic task of institutional design therefore
becomes to develop configurations of institutions
that will ensure compliance by their members with
the wishes of their 'principals‘.
A Tabula Rasa. Unlike other models of institutions
being discussed here, the rational choice
perspective assumes that institutions are being
formed on a tabula rasa.
The outcomes of the design process are
Normative institutionalism as developed by March
and Olsen (1989) underlines the role of values and
logic of appropriateness in defining institution
(Peters 1999) meaning that institutions can be
considered as embedding rules and routines that
define what constitutes appropriate action.
The norms and formal rules of institutions will
shape the actions of those acting within them.
Institutions are viewed as independent entities that
over time shape a polity by influencing actors’
preferences, perceptions, and identities.
In this sense, institutions are endogenous.
This approach can be readily contrasted with
rational choice institutionalism: rather than a series
of calculated actions designed to maximize
perceived benefit, any given actor within an
institution will feel to some extent constrained and
obligated by the norms and rules of the institution.
Logic of appropriateness specifies what is
appropriate for a particular person or role in a
The logic of rule driven mandatory action is: “What
sort of situation is this? What kind of person(s) am
I (are we)? What does a person like myself do in
situation like this?”
The “logic of appropriateness” as defined by the
values of the institution prescribes parameters of
The logics of appropriateness develop over time and
through interactions among institutional members. In
this sense it is evolutionary by nature (Peters 1999).
NI as its title reflects the central role assigned to norms
and values within organizations in explaining behavior
in this approach.
Individuals are not atomistic but rather are embedded
in a complex series of relationships with other
individuals and with collectivities.
They are, assumed to be always influenced by their full
range of organizational attachments and hence cannot
be autonomous, utility maximizing and fully rational
individuals assumed by RCI.
Another way to understand the differences that
March and Olsen posit between their approach to
politics and the RCI is in the diffe re nce be twe e n
e xo g e no us and endogenous preference formation
(March and Olsen, 1996).
For RCI, the preferences of political actors are
exogenous to the political process, and are shaped
by forces beyond the concern of the immediate
For normative institutional theories, on the other
hand, individual preferences are shaped to a large
extent by their involvement with institutions (see
These two models are mirrored in the distinction
made by March and Olsen (1989) between
aggregative and integrative political processes.
The former format is in essence a contractual form
for organizations, in which individuals participate
largely for personal gain.
The latter form of organization comes closer to the
idea of an institution as expressing a 'logic of
Participation in integrative institutions is
undertaken on the basis of commitment to the
goals of the organization, or at least an
"acceptance of the legitimate claims of the
For March and Olsen, an institution is not
necessarily a formal structure but rather is better
understood as a collection of norms, rules,
understandings, and perhaps most importantly
Political institutions are collections of interrelated
rules and routines that define appropriate action in
terms of relations between roles and situations.
They go on to say that 'institutions have a
repertoire of procedures and they use rules to
select among them.
And also institutions are defined by their durability
and their capacity to influence behavior of
individuals for generations (1995, p.9).
Likewise, institutions are argued to possess an
almost inherent legitimacy that commits their
members to behave in ways that may even violate
their own self-interest.
"Perhaps 'the most important feature of the March
and Olsen conceptualization is that institutions
tend to have a 'logic of appropriateness' that
influences behavior more than a 'logic of
consequentiality' that also might shape individual
That is, if an institution is effective in influencing
the behavior of its members, those members will
think more about whether an action conforms to
the norms of the organization than about what the
consequences will be for him- or herself.
Perhaps the extreme example would be the
behavior of soldiers who face almost certain death
but still behave 'appropriately' (Macdonald, 1983),
or firemen who willingly enter blazing buildings
because that is the role they have accepted as a
function of their occupational choice and their
training in the fire service.
This 'appropriate' behavior can be contrasted to
that assumed by economic models, in which
individuals are expected to think first what the
objective pay-off will be for them.
That is, individuals will make conscious choices,
but those choices will remain within the parameters
established by the dominant institutional values.
Those choices also will require that each individual
make an interpretation of just what the dominant
institutional values are; even the most thoroughly
developed institutions will leave many areas of
behavior open to interpretation by individual
This will, in turn, require some means of
monitoring behaviors and reinforcing dominant
views about appropriateness.
The logic of appropriateness also operates in less
extreme situations than the ones outlined above.
In most cases the logic of appropriateness in
public institutions may be manifested through
rather ordinary activities such as serving the client
as much as possible, or not engaging in corruption
on the job .
These are very routine standards of proper
behavior, but in this normative conception of
institutions it is the routine and the mundane that
Therefore, there will have to be enforcement
mechanisms to deal with inevitable cases of
deviance, but for most decisions at most times
routines will be sufficient to generate appro priate '
pe rfo rm ance .
Pe rhaps as im po rtant is the sim ple fact that the
presence of routines may help to identify what the
exceptional, and therefore the important, cases for
any organization are.
These exceptional cases may create the common
law within organizations that define what is really
appropriate and what is not.
The operation of the logic of appropriateness can
be seen as a version of role theory. The institution
defines a set of behavioral expectations for
individuals in positions within the institution and
then reinforces behavior that is appropriate for the
role and sanctions behavior that is inappropriate.
Some aspects of the role may apply to all
members of the institution, while other
expectations will be specific to the position held by
Further, like organizational culture there may be
several versions of the role among which a role
occupant can pick and choose - think of the
Thus, when individuals are inducted into an
institution, they will in most instances have been
pre-socialized by their membership in the society.
Some common norms - reciprocity, honesty,
cooperation - that are important for public actors
are learned as a part of the general socialization
Routines are means through which individual
members of an institution can minimize their
transaction and decision-making costs during
Further, they are means through which the
institution can enhance its own efficiency and
As March and Olsen point out, all organizations
develop routines and then employ those routines
as the means of monitoring and reacting to
changes within their task environments.
In some way the routines define the nature of the
organization - police departments will have
different routines than do fire departments,
although both are in the 'public safety' business.
As routines become more established and have
some greater meaning attached to them the
degree of institutionalization within the structure is
The above are partial answers to the question of the
origins of institutions, but only partial ones.
For example, while individuals may bring with them a
variety of values when they join most institutions, the
answer does not appear very satisfying for institutions
that have rules and values that are quite different from
those found in the surrounding society, but which yet
perform important services for that society.
Again, the military or quasi-military organizations
appear to be the best examples here. Even within
more 'normal' political institutions the personal
ambition of politicians may not correspond very well to
societal norms about the role of the public official as a
servant of the people.
In particular, Brunsson and Olsen argue that the
the degree of disjuncture between the values
professed by an institution and its actual behavior,
and the values held by surrounding society and the
behavior of the institution, the more likely will
change be. Further, in this
view, change is rarely the rational, planned
exercise found in strategic
plans, but rather tends to be emergent and more
Individual and Institutional interaction
It is clear how institutions affect individual behavior in
normative institutionalism. Institutions have their
'logics of appropriateness' that define what behavior
is appropriate for members of the institution and
which behavior is not.
Members of that institution violate those norms only
at their peril.
A trader who violates the rules of the market risks
being excluded from subsequent deals, just as a
member of Parliament who violates norms about
party loyalty may 'have the whip withdrawn,' and
In order for this logic of appropriateness to be
effective there must be some form of
enforcement. As noted above, most institutions
do have those means of enforcement, even if
they have no formalized means for adjudication
There are always informal means through which
members can be pressured to conform.
Part of the argument for positing a normative
basis for institutions is that in effective institutions
the sanctioning and enforcement processes are
built into the structures themselves through
The March and Olsen perspective proposed several
important theoretical components for political
science as a discipline.
One such element was the return to its institutional
roots and to a sense of the collective, as opposed to
individual, roots of political behavior.
Individuals are important in their model and still
ultimately must make the choices, but those choices
are largely conditioned by their membership in a
number of political institutions.
In this view the structure-agency problem is resolved
through the individual accepted and interpreting the
values of institutions.
A second crucial element of the March and Olsen
view is that the basis of behavior in institutions is
normative rather than coercive.
Rather than being guided by formal stated rules
the members of institutions are more affected by
the values contained within the organizations.
There is no independent means of ascertaining
whether it was values that produced behaviors,
and no way of arguing that it was not the root of