29.Economic Sociology and New Institutional Economics

VICTOR NEE and RICHARD SWEDBERG

When economic sociology appeared on the academic scene in the mid-1980s its interactions with New Institutional Economics were soon plentiful as well as productive. Especially the ideas of Oliver Williamson and Douglass North were often discussed and found useful. That this was a fruitful interaction is exemplified not least by the fact that Williamson’s notion of “hybrid” was developed in response to comments on his distinction between markets and hierarchies by some sociologists. The concept of “transaction cost” soon became part of the sociological language, and sociologists suddenly seemed more receptive to ideas of economists than they had been for a very long time.

A few years later, however, the interactions between new institutional economists and economic sociologists began to become less frequent and productive. A number of sociologists have continued to visit the annual meeting of ISNIE, and articles by sociologists occasionally appear in a journal such as Journal of Institutional and Theoretical Economics. There is also the recent anthology by Mary Brinton and Victor Nee—The New Institutionalism in Sociology (1998)—which represents a very successful attempt to bring together sociologists and economists around the issue of institutions. On the whole, however, since a decade or so there is considerably less interaction than one could have wished for.

This chapter represents an attempt to remedy this situation and further a two-way traffic between economic sociology and New Institutional Economics. We feel that economic sociology has enormously much to learn from New Institutional Economics and that this Handbook can play a constructive role in this process. We also feel that economists working in the tradition of New Institutional Economics may want to be better informed about what has been happening in economic sociology during the last few years, not least when it comes to such common interests as the concept of institution and the role of institutions in economic life. Reflecting these concerns, we have structured this chapter in the following way. We will first summarize developments in economic sociology since the early 1990s, when the link between the two fields started to become weaker. We shall the turn to the concept of institution and how it can be improved. We will also relate the concept of institution to norms, similarly trying to advance the discussion by introducing some new ideas.

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1.ECONOMIC SOCIOLOGY: RECENT DEVELOPMENTS

The last ten to fifteen years have been characterized by an extremely dynamic growth in economic sociology and also by the gradual institutionalization of this field (see Table 1). Some new topics have been broached, such as wealth, entrepreneurship and the role of law in the economy. Earlier insights have been elaborated upon and developed in new directions. The latter is true, for example, for Mark Granovetter’s well-known ideas about embeddedness and Harrison White’s theory of production markets. There is also an ongoing attempt to consolidate the insights in economic sociology by going back to the classics and learn from these.

What struck economic sociologists as important in the mid-1980s differs to some extent from what they see as important today. The same is true for the relationship of economic sociologists to economic theory: what they saw as important two decades ago is not necessarily what they find suggestive and interesting today. The concern with transaction costs, for example, has grown

Table 1. Contemporary Economics Sociology

Programmatic Statements: Popular Classics: Max Weber, Economy and Society (1920); Karl Polanyi in Trade and Market in the Early Empires (1957); also Karl Marx, Capital (1867)

Modern Landmarks: Mark Granovetter, “Economic Action and Social Structure: The Problem of Embeddedness” (1985); also: Pierre Bourdieu, “Principles of Economic Anthropology” (1997, 2001).

Basic Approach: Economic phenomena can be analyzed with the help of the sociological apparatus (its ideas, concepts and methods). The relationship between economic phenomena and non-economic phenomena is central as well.

Central Conceptual Tools: embeddedness, networks (including actor-network-theory), an interest-based concept of institutions, fields (organizational and other), capital (social, cultural and so on).

Introductions to Economic Sociology: Handbook of Economic Sociology (1994, 2nd ed. forthcoming in 2005); Sociology of Economic Life (main reader); Sarah Babb and Bruce Carruthers, Economy/Society (undergraduate textbook); Richard Swedberg, Principles of Economic Sociology and Carlo Trigilia, Economic Sociology (medium-level introductions); Mary Brinton and Victor Nee (eds.), The New Institutionalism in Sociology (economists and economic sociologists, advanced introduction).

Current Strongholds: In the United States: major universities such as Cornell, Stanford, Berkeley, Princeton and Northwestern; also some business schools, such as the Sloan School of Management (MIT) and the University of Chicago Business School. In Europe, economic sociology is especially strong in France (Paris, Lille), Germany (Goettingen, Cologne), England (London, Cambridge) and Scotland (Edinburgh).

Key People:Wayne Baker, Jens Beckert, Nicole Woolsey Biggart, Luc Boltanski, Mary Brinton, Ronald Burt, Michel Callon, Bruce Carruthers, Gerry Davis, Frank Dobbin, Peter Evans, Neil Fligstein, Bai Gao, Gary Gereffi, Mark Granovetter, Mauro Guill´en, Karin Knorr Cetina, Donald MacKenzie, Mark Mizruchi, Victor Nee, Joel Podolny, Walter Powell, Richard Swedberg, Laurent Thevenot, Brian Uzzi, Harrison White and Viviana Zelizer

Recent Key Monographs: Pierre Bourdieu, Social Structures of the Economy (2004), Jens Beckert, Unearned Wealth (forthcoming), Bruce Carruthers, City of Capital (1996), Frank Dobbin, Forging Industrial Policy (1994), Neil Fligstein, The Transformation of Corporate Control (1990), Mark Granovetter, Getting A Job (1974, 1995), Richard Swedberg, Max Weber and the Idea of Economic Sociology (1998), Harrison White, Markets from Networks (2002), and Viviana Zelizer, The Social Meaning of Money (1994).

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weaker; while the interest for work by economists on institutions has grown steadily in importance. While studies of markets in a decade or so ago routinely commented on transaction costs, this is not the case today. There is also a growing sense that that economic sociology and behavioral economics have quite a bit in common.

Theory and Theory Related Advances

When economic sociology was revived in the mid-1980s sociologists were basically at a loss when it came to theory. There was a strong sense that sociologists should develop their own approach, and that this approach should differ from that of mainstream economics—but that was about all. The heritage of economic sociology, especially the powerful ideas of Max Weber on Wirtschaftssoziologie, were not an option since they were little known (cf. Swedberg 1998). To draw on Marx’s work did not seem much of an option either, since the days of radical sociology were over.

It was in this situation that Mark Granovetter came up with the suggestion that it might be possible to bring together the ideas of Karl Polanyi on embeddedness with those of networks analysis (Granovetter 1985). Following this suggestion, the task of economic sociology would primarily be to trace the way that economic actions are structured via networks. Economic actions, in brief, do not follow the short and direct paths of maximization, as the economists claim, but rather the considerably more complex paths of existing networks. Granovetter also suggested that networks can account for institutions, by conceptualizing the latter as “congealed” networks (Granovetter 1992:9).

This embeddedness project has met with some success; and during the recent decade it has, for example, been used quite a bit as well as added to by Granovetter, his students and some other scholars (e.g. Uzzi 1996, 1997; Portes and Sensenbrenner 1993). During the last ten years this perspective has, however, also been increasingly challenged by a number of economic sociologists; and one may even speak of a general discontent in contemporary economic sociology with the embeddedness perspective, accompanied by an attempt to go beyond it (e.g. Nee and Ingram 1998, Krippner 2001). One of those who have challenged the ideas of Granovetter et al is Pierre Bourdieu, who has criticized the embeddedness approach primarily for its exclusive focus on personal interactions and for its failure to deal with structural factors (e.g. Bourdieu 2000). As a remedy to this, Bourdieu himself has suggested that the concept of field is used, since it allows the analyst to handle macro issues as well as structural effects (e.g. Bourdieu forthcoming).

Several economic sociologists have also been less critical of mainstream economics than what Granovetter is; and these often draw on the work by various members of New Institutional Economics. They stress that Granovetter has difficulty in dealing with the role of institutions in economic life (as opposed

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to interpersonal networks), and that sociologists have much to contribute to clarifying the relationship between informal and formal elements of institutions (e.g. Nee and Ingram 1998). There also seems to be an affinity between those in favor of the embeddedness approach and a positive attitude to situations characterized by dense interpersonal relations, as opposed to situations where impersonal interactions predominate, as in much of modern capitalism (e.g. Uzzi 1996).

How much economic sociologists should draw on game theory represents another issue that has recently been raised, and for which the embeddedness approach provides little guidance (e.g. Swedberg 2001). Since a few years back the major journals in sociology regularly contain analyses that draw on game theory. Economic sociologists, on the other hand, have basically been suspicious of game theory. At the most they have shown sympathy for attempts to mix empirical analysis with game theory of the type that can be found in the wellknown work of Avner Greif (e.g. Greif 1998). All in all, we may conclude that economic sociology is currently characterized by several theoretical approaches, and that a theoretical core is missing.

While sociologists have often been hostile to economics, it has gradually come to be understood that economics is a multifaceted science and that it also contains many ideas that are of relevance to economic sociology. Some economists, on their side, have also come to think that they can improve their own analyses by opening these up to sociological concepts and ways of thinking. The work of Herbert Simon has, for example, continued to be close in spirit to economic sociology (e.g. Simon 1997). This is also true for the work of George Akerlof and Jeffrey Sachs (e.g. Akerlof and Kranston 2000, Sachs 2000). Some economic sociologists have also been attracted by the attempts of Douglass North and Avner Greif to resurrect the concept of institution and improve upon it in the spirit of New Institutional Economics (e.g. Greif forthcoming, North 1990).

New Developments in Analyzing Old Topics (Networks, Markets and Firms)

In Granovetter’s article on embeddedness from 1985 it was argued that economic activities were not simply embedded in social relations but in networks. Many of Granovetter’s students at the State University of New York at Stony Brook in the 1980s would also use network analysis in their studies of the economy. Some of them focused on the kind of networks that develop around firms, while others analyzed the networks that are formed by directors sitting on several boards, so-called interlocks. While big hopes were initially attached to the latter type of study, it was eventually realized that research on interlocks had a rather limited potential (e.g. Mizruchi 1996).

One of the great strengths of networks analysis is that it represents a flexible and sophisticated tool with which a number of social phenomena can be approached, and recent developments in economic sociology tend to confirm

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this (e.g. Rouch and Casella 2001, Zuckerman 2003). Networks analysis has, for example, been used to explore various types of economic interactions which cannot be categorized either as customs or as some kinds of economic organization. These intermediary social forms are sometimes referred to as “network forms of organization” (e.g. Podolny and Page 1998). In a very influential work from the early 1990s Ronald Burt suggested that also entrepreneurship can be understood with the help of network analysis (Burt 1993). His basic idea is that an entrepreneur connects two groups of people who otherwise would be socially disconnected, say buyers and sellers. The entrepreneur, in his or her capacity as a middleman, straddles according to this argument a so-called “structural hole”.

A special mention should also be made of business groups, which are typically studied with the help of networks. Through an article in the early 1990s Mark Granovetter gave great visibility to this topic, and since that time an increasing number of studies have been devoted to this phenomenon (Granovetter 1994; for an overview, see Granovetter forthcoming). One insight produced by this research is that in several countries in Europe, Asia and Latin America, business groups account for a significant part of the economy. In the United States, in contrast, this type of groups is much less common, probably because of anti-trust legislation.

Network analysis has also been used to analyze consumption, a development which can be exemplified by an interesting study by Paul DiMaggio and Hugh Louch (1998). Its focus is on a very special kind of consumer purchases, namely those for which people use their own networks of friends and acquaintances; and these purchases are then contrasted to purchases of the type where the buyer does not need to use a referral or network. Padgett and Ansell have finally carried out a very suggestive historical study with the help of networks analysis (Padgett and Ansell 1993). The famous Medici family, it is argued, held its power partly because of its great skill in building and activating various types of economic and political networks.

A special mention should also be made of a European version of networks theory, called actor-network-theory (ANT; e.g. Callon 1989, Law and Hassard 1999). The basic idea here is that not only individuals and firms can be actors but also objects. What is meant with this paradoxical statement is that the analysis should not exclusively focus on social relations but also include objects; and the rationale for this is that objects may be part of social interactions or steer social interaction in some distinct direction. As examples one can mention the way that, say, surveillance technology enables supervisors to track employees or how an assembly line presupposes that workers coordinate their actions.

Together with networks, markets have been one of the central topics in economic sociology from early on. One of the articles that helped to launch economic sociology in the 1980s was devoted to precisely this topic (White 1981). Its author was Harrison C. White, a physicist turned sociologist, and a major

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figure in 20th century sociology. After leaving the topic of markets for a period in the early 1990s, White resumed work on this topic, adding various features to his earlier model (e.g. White 2001). One of White’s followers, it should also be mentioned, has followed up on his ideas about the relationship between market and identity (Aspers 2001).

According to White’s theory, the typical (industrial) market has a small number of actors who, by signaling to one another through price and volume, form a coherent group with a stable social structure—in brief, a market. Complementing White’s theory is Neil Fligstein’s view that the characteristic feature of modern markets is their stability (Fligstein 1996, 2001). Market actors, according to this perspective, do not want volatility in price or cutthroat competition, but stable markets without any surprises. Fligstein has also recently analyzed the rise of the shareholder value-conception of the firm, which currently dominates corporate America (Fligstein and Shin 2004; cf. Dobbin and Zorn forthcoming).

Before leaving the topic of markets, a special mention should be made of an elegant study by Joel Podolny on the role of status in markets (Podolny 1992). The argument here is that buyers are willing to pay a premium for status, something which is obviously profitable for the seller. Having status, however, also restricts the seller to a small market, since he or she would otherwise lose status (and the earlier market).

Just like networks and markets have been on the agenda of economic sociology for two decades by now, so have firms. One major reason for this is that sociologists since long time back have done work in organization theory and, as part of this, studied firms. There is also the fact that many economic sociologists are employed in business schools, where organization theory is often seen as helpful. One important contribution that sociologists have made to the analysis of firms, and which has grown considerably in importance during the last decade, is that of population ecology (Hannan and Freeman 1988; Hannan and Carroll 1995). The main focus here is on populations of firms in some area of the economy (say railroads, newspapers or breweries), instead of on a single firm or on a few firms. The task then becomes to study how these populations of firms at some point in time come into being, expand, and gradually decline. Another contribution, which has developed forcefully during the last decade, has to do with the diffusion of ideas or various ways of doing things in a population of firms (e.g. Davis 1991). The way that the social relations between the firms are structured, will clearly influence the speed as well as the range of the diffusion.

The main novelty, when it comes to recent sociological research on firms, however, has to do with entrepreneurship. While this topic was occasionally touched on in the 1980s, one could not really speak of a sociology of entrepreneurship—something which is possible today (e.g. Thornton 1999, Swedberg 2000). Mark Granovetter, for example, has helped to explain why people who are not particularly entrepreneurial in their home countries may become successful entrepreneurs once they are in a foreign environment (Granovetter 1995). The secret, Granovetter suggests, is that extended family ties may prevent entrepreneurship in the home country, but will be absent in the

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new country—with forceful entreprenurship as a result. AnnaLee Saxenian has added to Alfred Marshall’s ideas about industrial districts through her study of Silicon Valley (Saxenian 1996). By contrasting the decentralized and informal social structure of Silicon Valley in California to the centralized and formal social structure of Route 128 in Massachusetts, Saxenian has tried to get a handle on the factors that are conducive to entrepreneurship. In his study of village enterprises in China, Yusheng Peng (2004) confirmed empirically a sociological hypothesis on informal privatization which explains property rights as arising from social norms of close-knit entrepreneurial networks.

Some New Topics (Finance, Law, Stratification, Comparative-Historical Studies)

While one may speak of a certain continuity in the study of networks, markets and firms among economic sociologists, even if new and important contributions have been made during the last decade, this is much less the case with the topics that will now be discussed. In finance, for example, a number of important developments have taken place during the last decade. Sophisticated analyses of the social mechanisms that operate in this type of markets have begun to appear, as exemplified by the studies of Donald MacKenzie and Ezra Zuckerman (MacKenzie 2003, MacKenzie and Millo 2003, Zuckerman 1999). In a study conducted with Yuval Millo, Donald MacKenzie argues that option markets may have been partly created with the help of economic theory—which is then used to explain the workings of this very market (so-called performativity theory). Ezra Zuckerman analyzes the penalties that firms have to pay that are not tracked by security analysts.

First and foremost, however, economic sociology has brought ethnography and culture to the study of finance, and thereby altered the kind of questions that may be asked and also what kind of material to look for. This way, for example, Viviana Zelizer has discovered that people in their everyday lives do not look on money as some unitary kind of substance, as most social theoreticians do, but rather divide it up into different monies or currencies (e.g. Zelizer 1989). Karin Knorr Cetina and Urs Brugger¨ (2002) have drawn on phenomenology to analyze what it means for people such as brokers, to interact with each other with the help of computers.

Law and economics emerged as a distinct field of inquiry many years before modern economic sociology came into being, and at first attracted little attention among economic sociologists. Slowly, however, it has been realized by economic sociologists that law constitutes a central part of the modern economy; and a broad program for how to analyze its role from a sociological perspective has recently been formulated (Swedberg 2003a, 2003b; cf. Edelman and Stryker forthcoming). This program outlines the tasks that an “economic sociology of law” may want to undertake; it also points to a small number of already existing studies that are highly relevant in this context.

One of the most important of these already existing studies has been authored by Lauren Edelman, who is the modern pioneer in introducing a sociological

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approach to law and economics. She has especially suggested that one should bring together the study of organizations with that of law; and one of her earliest studies that does precisely this, deals with due process in the workplace (Edelman 1990). The same approach can also be found in another study, in which a related subject matter is analyzed, namely the legalization of the workplace (Sutton et al. 1994).

But there is more to the current attempt to develop a sociological approach to law and economics. There exists, for example, an innovative attempt to show how networks analysis may be of help in analyzing the social structure of illegal cartels (Baker and Faulkner 1993). There is also a study that suggests that the privatization process in Eastern Europe may have created a new type of property (Stark 1996).

To claim that the study of stratification and wealth, would represent a new topic for economic sociology may seem strange to everybody, except perhaps sociologists. Is it not precisely these two topics that economic sociology is all about, from Marx and Weber to C. Wright Mills and beyond? Questions of inequality, however, are today exclusively handled in sociology in a special subfield called stratification, and not in economic sociology. And wealth, as it turns out, is rarely studied at all in contemporary sociology. Recently, however, stratification experts and economic sociologists have begun to study wealth and also to relate it to the workings of the economy (e.g. Keister and Moller 2000, Spilerman 2000). Another illustration of the attempt to bring together the study of stratification with the workings of the economy, can be found in the work of Victor Nee (1989). Using recent changes in China as his empirical example, Nee argues that when a society goes from redistribution to exchange via the market, this tends to be reflected in its stratification system. This so-called market transition theory has led to a lively debate among sociologists (e.g. Cao and Nee 2000), which has stimulated research by economic sociologists to clarify the state’s role in instituting the rise of a market economy and sustaining economic development in transition economies (e.g., Nee 2000; Walder 1995; Peng 2001).

Before concluding this brief overview of recent developments in economic sociology, something also needs to be said about the recent attempt to develop a historical and comparative economic sociology. Sociologists have a long and successful tradition of analyzing historical and comparative topics, and it is sometimes argued that these two topics represent areas where economic sociologists have comparative advantages in relation to economists. However that may be, to exemplify this trend a few studies of this type should be mentioned.

Some of these are historical in nature, such as the study by Carruthers and Espeland (1991) of the evolution of accounting and the one by Granovetter and McGuire (1998) of the social construction of the electrical utilities industry in the United States. Others cover different countries and periods, basically arguing that the same economic activities can be organized in different ways, and that there consequently is little support for the argument that there only exists one optimal way of doing things. Marion Fourcade-Gourinchas, for example,

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makes this point for economic theory itself, by showing how economic theory reflects the social environment of the countries in which it has emerged (Fourcade-Gourinchas 2001). Jens Beckert (forthcoming) traces the evolution of inheritance law in the United States, Germany and France since the 18th century in an exemplary study. Frank Dobbin, finally, suggests that the industrial policy of various countries differ from each other, but also that they are deeply influenced by the way that political power is organized (Dobbin 2001).

2. NEW INSTITUTIONALISM IN ECONOMIC SOCIOLOGY

After this brief introduction to recent developments in economic sociology, we shall proceed to a discussion of the concept of institution and to the question of how institutions are related to norms and similar social mechanisms. We will not provide an overview of what sociologists have said about institutions during the last century, not only because this would take up far too much space but also because it has already been done a number of times (e.g. DiMaggio and Powell 1991, pp. 1-38, Stinchcombe 1997). We shall instead limit ourselves to the following summary observation. While early sociologists tended to restrict the concept of institution to central and key aspects of society (such as politics, the economy and the family), some sociologists use it in a considerably broader sense. According to the view of so-called new institutionalism in organizational analysis (Powell and DiMaggio 1991), where the role of culture, sense-making and the diffusion models of behavior are emphasized, pretty much anything is viewed as an institution, including a dance and a handshake (e.g. Jepperson 1991). Organizational new institutionalists also tend to downplay the concept of interest and prefer instead to focus on those aspects of institutions that are not related to interests (DiMaggio 1988).

This view of institutions, we argue, tends to take the edge out of the concept of institution, which in our opinion should be restricted to those areas of society where interests come into play in an important and direct manner—such as politics, the economy and the family. The strength of institutions, we also argue, comes precisely from the fact that they channel interests or, to put it differently, present dominant models for how interests can be realized. These models are typically surrounded by a sense of legitimacy or they would not be stable over time. They are also often enforced by law because of their very centrality to society. Institutions have in some cases been consciously designed—say in a constitution—but they may also develop in a gradual and largely unintended manner, along the lines that Hayek suggests (e.g. Hayek 1982). Since institutions regulate areas of society that are of great importance to individuals, they are often contested and reflect struggles in society.

We suggest the following definition:

An institution may be conceptualized as a dominant system of interrelated informal and formal elements—customs, shared beliefs, norms, and rules—which actors orient their actions to when they pursue their interests. In this view,

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Interests can be of different types, say ideal or material.2 One way of putting interests at the center of the analysis is to conceptualize institutions as dominant models for how interests should be realized. The individual who wants to realize her self-interest will, following this approach, typically orient her actions to the institution; meaning by this that if she wants to realize her interests she will have to follow the general rules or prescriptions for how to behave. As Raymond Boudon (1987) insists, rationality is context-bound insofar as institutions determine the incentive structure. The individual may also chose not to follow the institutional model, in which case sanctions will typically occur. Implicit in the choices made by individuals is consideration of costs and benefits entailed in a course of action. By emphasizing the independence of the actor (through the notion of “orienting oneself to rules”, rather than simply “following rules”), we proceed in the spirit of methodological individualism.

When one presents the concept of institution as a dominant model for how to realize interests, it is important not to emphasize the element of model to the point that the individual disappears; hence new institutional economic sociology, like economics, focuses on self-interest as motivation for action. The reason for this is that society does not consist of models or rules but of ongoing activities, and similarly there are no institutions per se but only institutions in action. This means that ongoing institutions are invested with the power that comes from a number of individuals acting out their patterns of behavior in an effort to realize their interests, and it is precisely this that gives institutions their enormous force and importance in society. If institutions are hard to change, it is not only because models of behavior are hard to change because of inertia (an important topic in its own right), but because they are invested with the force that comes from interests-in-action (e.g., Nee forthcoming).

The concept of institution that we are proposing takes two key ideas of economics very seriously: the idea of interest and the idea of methodological individualism; and this is an important reason why we term it a new institutionalist perspective. As sociologists, however, we also want to highlight the role that social relations and norms play in the concept of institutions; and we shall now turn to the challenge of specifying and explicating the social mechanisms that determine the relationship between the informal social organization of close-knit groups and the formal rules of institutional structures monitored and enforced by organizations and states.

Informal Institutional Elements

It is clear that new institutional economics has forcefully contributed to explaining the emergence and maintenance of formal institutional arrangements that

2 Economic sociologists and new institutional economists concur in assigning a huge importance to the role of political motives and ideology in social analysis. We differ, however, in that we suggest (with Max Weber) that this type of motives be termed “ideal motives” since they basically operate as driving forces, similar to economic interests. Also religious and altruistic motives qualify as ideal interests according to this terminology.

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shape economic behavior. However, as North (1993:12) acknowledges, economics has largely “ignored the informal constraints of conventions and norms of behavior.” Economists pose probing questions about the social dimensions of economic life as they encounter the limits of economic analysis of institutions (e.g. North 1991; Williamson 2000). Their questions address the manner in which informal social organization, formal rules and interests combine to shape the performance of organizations and economies. With recent advances in application of game theory, economists recently have also begun to incorporate informal institutional elements into their models of economic performance (Greif 2004; forthcoming). While economic sociologists may not have all the answers, clearly in cross-disciplinary research aimed at explaining the capacity of social institutions to facilitate, motivate and govern economic behavior, sociology’s comparative advantage is to address questions that focus on the social mechanisms that channel economic interests and shape economic behavior. Such mechanisms are embedded in networks and norms, the informal institutional elements sociologists have emphasized in their studies of economic life.

While Figure 1 outlines the way institutions are sometimes seen in new institutional economics, Figure 2 provides a schematic representation of the multi-level causal model for the new institutionalism in economic sociology, which is related to but different from the new institutionalist models proposed by Williamson (1994). The institutional environment—the formal regulatory rules monitored and enforced by the state that govern property rights, markets

Institutional

Environment

Governance

Behavioral

Attributes

Endogenous

Preferences

Individual

Figure 1. A model of new institutional economics.

Source: Williamson 1994: 80.

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Production Market

/Organizational Field

Institutional

Framework Organizations:

Firm/Nonprofit

Incentives;

Social Groups Endogenous

Preferences

Individuals

Figure 2. A model for the new institutionalism in economic sociology.

Source: Nee (Forthcoming).

and firms—imposes constraints on firms through market mechanisms and state regulation, thus shaping the incentives structure and the notions of how interests can be realized. The institutional mechanisms operating at this level are distal, as opposed to the proximate social mechanisms at the microand meso-levels of individuals and their interpersonal ties.

Institutional mechanisms encompass the deeper causes because they shape the incentive structure for organizations and individuals, and thereby the contexts in which proximate mechanisms operate and interests are realized. The institutional-level mechanisms posited by economists and sociologists, despite differences in behavioral assumptions and conceptual language, are not as far apart as is commonly perceived. New institutional economists emphasize incentives reinforced by the monitoring and enforcement of formal rules, a mechanism widely accepted by both political economy and sociology. The new institutionalism in economic sociology specifies the manner in which the norms of close-knit groups interact with formal rules in the realization of interests.

The variety of market mechanisms schematically represented in the downward arrow from the institutional environment to the organizations includes those embedded in labor markets, capital markets, raw material markets, and so on. Surprisingly perhaps, economists generally don’t focus on markets as such,

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but just assume their existence in the neoclassical view of perfect competition in markets underlying the supply-demand curve. The institutional framework encompasses formal rules of the institutional environment and norms embedded in ongoing social relations, which interact to shape economic behavior. Whether conceived as an organizational field or a production market, sociologists tend to focus on the dynamics of interfirm relations to explain the behavior of individual firms. Paul DiMaggio and Walter Powell (1983) explain the surprising similarity of organizational practices in an organizational field of related firms by reference to the value of legitimacy to the firm’s survival and success. Similarly, Harrison White (1981, 2001) models the social structure of so-called production markets as arising from firms competing and maneuvering for advantage and status with peer firms in a market niche. They are guided by the signals they read from the operations of their peers. In competitive markets, pressures on firms stemming from Darwinian selection processes necessitate an interest-related logic of strategic action, differing in emphasis from the legitimacy-centered orientation of nonprofit organizations—public schools, museums, day-care centers—which are dependent on state and federal government and philanthropy for resources.

Legitimacy is also important for enterprises, as manifest in firms’ investments in promoting brand-name recognition, reputation for reliability and quality service or product, and compliance with federal and state laws, but legitimacyseeking is driven mainly by the firm’s interest in its survival and profitability in competitive markets. For nonprofit organizations, especially, legitimacy is an essential social capital increasing the chances for optimizing access to scarce resources. For both, legitimacy can be viewed as a condition of fitness which enables for-profit firms and nonprofit organizations to enhance their survival chances and secure advantages in economic and political markets. Processes of conformity with the rules of the game and cultural beliefs in organizational fields—isomorphism—motivate and guide organizations, endogenously giving rise to increasing homogeneity within an organizational field (DiMaggio and Powell 1983).

The bottom box of this multi-level causal model overlaps with the earlier embeddedness concept, which argue that the nature and structure of social relationships have more to do with governing economic behavior than do institutional arrangements for realizing interests and related organizational form. Specifically, Granovetter (1985: 490) refers to the “role of concrete personal relations and structures (or ‘networks’) of such relations in generating trust and discouraging malfeasance,” which he attributes to the human preference for transacting with individuals known to be trustworthy and for abstention from opportunism. But what explains motivation for trustworthiness and abstention from opportunism in ongoing social relationships? Why is trustworthiness found more commonly in ongoing social relationships than in transactions between strangers?

The answer is to be found by specifying the mechanisms intrinsic to social relationships that develop and maintain cooperative behavior within close-knit groups, enabling actors to engage in collective action to achieve their interests. These mechanisms are rewards and punishment in social exchange and their use in the enforcement of social norms—shared beliefs and statements about

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expected behavior.3 Peter Blau’s (1955) classic field study of social exchange and networks in a federal bureaucracy, The Dynamics of Bureaucracy, confirms the efficacy of social rewards and punishment in facilitating, motivating and governing trustworthy behavior and group performance.4 In his detailed account of the interactions in the work group he studied made up of a supervisor, sixteen agents and one clerk, Blau provides a rare illustration of institutions in action: how self-interested action of individuals endogenously produce the informal social organization of a close-knit work group. In the work group Blau studied, agents consult fellow agents about the appropriate legal rules that apply to their case, rather than bring their questions to the attention of their supervisor who evaluates their work. Blau observed that the informal interactions between agents involve a social exchange similar in logic to a decentralized market exchange:

“A consultation can be considered an exchange of values; both participants gain something, and both have to pay a price. The questioning agent is enabled to perform better than he could otherwise have done, without exposing his difficulties to the supervisor. By asking for advice, he implicitly pays his respect to the superior proficiency of his colleague. This acknowledgement of inferiority is the cost of receiving assistance. The consultant gains prestige, in return for which he is willing to devote some time to the consultation and permit it to disrupt his own work. The following remark of an agent illustrates this: ‘I like giving advice. It’s flattering, I suppose, if you feel that the others come to you for advice.”’ (quoted from Homans 1974, p. 343).

Blau found that the more competent the agent, the more contacts she had with other agents, and the higher the esteem in which she was held. A few agents who were perceived as competent but who discouraged others from consulting them were disliked and had fewer contacts. These findings highlight the importance of social rewards and sanctions (e.g. esteem and disapproval) in the normative regulation of informal social organization (Homans 1974). Routine social exchanges, such as the one described by Blau, comprise the informal social organization that emerges and sustains the performance of formal organizations.

Norms are the informal rules that facilitate, motivate and govern joint action of members of close-knit groups, including attempts to realize their interests. They arise from the problem-solving activity of individuals as rule-of-thumb guidelines of expected behavior; and they are typically maintained through some sanction such as disapproval. Throughout history, norms have coordinated group action to improve the chances for success—the attainment of rewards and the realization of interests—through cooperation. As statements of shared beliefs about expected behavior, norms probably evolved together with language, as in the norms uttered by early hunting parties to coordinate action during the

3 Social ties and norms do not themselves constitute mechanisms insofar as they are concepts referring to elements of social structure—the relationship connecting two or more actors and the informal rules governing the relationship (Homans 1974; Nee and Ingram 1998; Emerson 1962; Blau 1964).

4 See Roethlisberg and Dickson (1939; Whyte (1943); Festinger, Schachter, and Back (1950); Schachter et.al. (1951); Jennings (1950); Seashore (1954); Bott (1957); Riley and Cohn (1958); Walker and Heyns (1962); Cook et.al. (1983); Ellickson (1991); Petersen (1992); Kollock (1994); Lawler and Yoon (1996).

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course of the expedition. Norms presumably evolved through trial and error, with success the arbiter of why a particular norm persists in equilibrium across generations and diffuses to different groups.5 Members of close-knit groups cooperate in enforcing norms not only because their interests are linked to the group’s success, but their identity as well (White 1992).

The relationship between informal and formal institutional elements

In uncovering the social norms of Shasta County, a sparsely settled rural county of northern California, where local ranchers and suburbanites maintain multiplex relationships, Ellickson “was struck that they seemed consistently utilitarian;” from which he inferred that “members of a close-knit group develop and maintain norms whose content serves to maximize the aggregate welfare that members obtain in their workaday affairs with one another” (Ellickson 1991:167). Norms coordinating individuals’ activities, as in the convention of arriving in a timely fashion at an agreed-upon social engagement, are not difficult to explain since it is easy to show that self-interested individuals share a common interest in complying with this convention. But the prisoner’s dilemma norm is more difficult to explain since self-interested individuals derive a greater payoff for opportunism in a prisoner’s dilemma game. What makes this game so important is that this type of dilemma is such a common feature of social and economic life. It is also the prisoner’s dilemma aspects of human interaction that give rise to opportunism in contractual agreements and in ongoing social relationships. To some degree, all social exchange resembles the prisoner dilemma game insofar as there is always a temptation not to reciprocate a good turn provided by a friend or acquaintance (Hardin 1988). The prisoner’s dilemma norm involves higher costs of monitoring and enforcement than coordination norms because it is always in the self-interest of individuals to free ride or defect. Hence, prisoner’s dilemma norms must be welfare-maximizing in terms of the Kaldor-Hicks criterion in order to create sufficient rewards to individuals to overcome the temptation to do so (Ellickson 1991:171; Posner 1986:11-5).

The nature of the relationship between informal social groups and formal organizations can substantially affect the cost of monitoring and enforcement of formal rules in institutional and organizational environments. The norms of close-knit groups can contribute to the realization of the organization’s goal if the interests embedded in welfare-maximizing norms are broadly speaking congruous with the incentives embedded in the formal rules. This condition is met when members of close-knit groups or networks perceive that their preferences and interests are aligned with the organization’s capacity to survive and profit. It is strengthened when members of networks identify with the organization’s goals.

5 Shibutani (1978) provides detailed observations about the emergence and maintenance of norms of a close-knit group of Japanese American soldiers in a military base, documenting norm emergence as a product of collective problem-solving as members of the group socially construct a definition of the situation and course of action that optimizes their welfare.

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the coercive actions by a specially created staff of people, we have a law (Weber 1978:34). Whether laws are seen as based on as ideology or cultural beliefs, they define the parameters of legitimate behavior to which organizations and individuals have to adapt and orient their actions. In keeping with their disciplinary traditions, economists emphasize the costs of opposing the coercive forces of the state, and organizational sociologists emphasize the value of legitimacy gained through recurrent compliance with the state’s rules. But in actuality whether the price of noncompliance is perceived as costs imposed by fines and penalties or as a loss of legitimacy, is moot in the sense that both are costly to the firm.

The institutional mechanisms of monitoring and enforcement operate directly on firms and nonprofit organizations through the costs of penalties and withholding of federal grants and contracts, but also have indirect effects. The increase in costs of discrimination—loss of legitimacy and financial penalty— following the Civil Rights era and its institutional changes decisively opened U.S. mainstream organizations to formerly excluded ethnic and racial groups (Alba and Nee 2003). The civil rights movement and the legislative changes enacted by Congress created a normative environment in which legitimacy was conditioned on fair governance through formal protections of the principle of equality of rights (e.g. Edelman 1990, 1992). Equal Employment Opportunity Law (EEO) defined broad parameters and guidelines of legitimate organizational practices with respect to minorities and women.

Because the civil rights era laws have weak enforcement features and are ambiguously stated, organizations construct the meaning of compliance “in a manner that is minimally disruptive of the status quo” (Edelman 1992:1535). This enables organizations to gain legitimacy and resources through the appearance of abiding by civil rights legislation. However, “once in place, EEO/AA structures may produce or bolster internal constituencies that help to institutionalize EEO/AA goals” (Edelman 1992:1569). The civil rights era laws may have their largest impact indirectly through professionals who generate “ideologies of rationality” or cultural beliefs about how organizations should respond to the law. Not only do high profile landmark court cases (e.g., Texaco, CocaCola)impose direct costs through penalties and loss of legitimacy to specific firms, but a more far-reaching effect of these court decisions, along with legal advice about what organizations can do to insulate themselves from costly litigation, is to generate cultural beliefs about the rationality of self-monitored compliance with anti-discriminatory laws. This is manifested in the diffusion of EEO-specified grievance procedures in organizations (Edelman, Uggen and Erlanger 1999). Thus ideologies of rationality and cultural beliefs have combined with the incentives and disincentives of the institutional environment, mediated by state regulation and market mechanism. This is consistent with causal model in Figure 2, suggesting that mechanisms of isomorphism align with the structure of incentives stemming from formal rules of the institutional environment.

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3. SOME ILLUSTRATIVE STUDIES IN NEW INSTITUTIONAL

ECONOMIC SOCIOLOGY

The causal model in new institutionalist economic sociology integrates a microfoundation based on an account of the rational pursuit of interests as contextbound, influenced by social relations and norms, with the idea that each economy has an institutional framework. As Figure 2 indicates, causal mechanisms operate in both directions, from macro to micro and micro to macro levels of analysis. The multi-level causal model therefore moves well beyond the earlier embeddedness perspective towards a social relations and institutions-approach that can better explain the emergence, persistence and transformation of economic institutions and behavior. As a conceptual framework, the new institutionalism in economic sociology also offers an open architecture for generating theories at the middle range, extending in this manner the sociological approach to understanding economic behavior. The central challenge in new institutional economic sociology is to specify and explicate the nature of the relationships between elements at different levels of the multi-level causal model, in order to explain how informal social organizations interact with large institutional structures. Here are two illustrations of such use of a multi-level causal model.

Example # 1: A Weberian Model of Economic Growth

Evans and Rauch (1999) specify a multi-level causal model to examine the effect of Weberian state structures on economic growth in developing economies. They argue that the characteristic feature of the institutional framework of the development state, as opposed to the predatory state, is the presence of relatively well-developed bureaucratic forms of public administration. As Weber argued in his theory of bureaucracy, the introduction of merit-based recruitment offering predictable career ladders established the basis for long-term commitments to bureaucratic service. Whether in the Meiji era bureaucracy in Japan or in late-developing industrial economies like China, the development of modern bureaucratic capacity at the service of reform politicians was critical to the government’s ability to monitor and enforce rules oriented to the promotion of economic development. At the level of individual action, close-knit groups of elite bureaucrats share norms and goals shaped by meritocratic rules for recruitment and promotion, which reduces the attractiveness of corruption. This Weberian model provides an alternative to Shleifer and Vishny’s (1994:1023) “grabbing hand of the state”-model that conflates bureaucrats and politicians, showing that politicians invariably “try to influence firms to pursue political objectives” inconsistent with the objective of economic growth. In the Weberian model, bureaucrats are distinct from politicians insofar as they are vested with long-term careers governed by meritocratic rules of recruitment and promotion. Norms, shared belief in meritocratic service, and national development goals not only reduce the temptation of corruption but over time give rise to competence

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Institutional

Environment

Figure 3. Evans and Rauch’s model on the effects of Weberian state structure on economic growth.

and credibility of commitment to civil service dedicated to the public good. The result is increased organizational capacity of the state, which in turn enables and motivates reform-minded rulers to increase revenues through economic growth rather than predation.

Example # 2: A Dynamic Game Theoretic Model of De-institutionalization

A multi-level causal model provides analytic leverage for the understanding of the emergence of market economies in post-socialist China, Eastern Europe and the former Soviet Union. When Western economists traveled to Eastern Europe and the former Soviet Union to advise reformers at the onset of market reforms, their advice consistently emphasized big bang approaches to instituting a market economy by designing sweeping changes in the formal rules governing property rights and markets. They assumed that formal rules—i.e., constitution, civil law and other regulations—instituted by administrative fiat would succeed in establishing a modern capitalist economy (e.g. Sachs 1995). Such efforts at

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capitalism by fiat change in the rules of the game overlooked the realities of power and interests vested in the ruins of communism.7

By contrast, the incremental reform approach taken by reformers in China allowed economic actors to base their choices of institutions on trial-and-error that balanced speed with a credible record of success. This more evolutionary approach to market transition soon gave rise to the most dynamic economy in the world. In China, institutional change was driven not so much by top-down changes in the formal rules, as by bottom-up realignment of interests and power as new organizational forms, private property rights and market institutions evolved in an economy shifting away from central state control over economic activity to market-driven firm performance.8 Changes in formal rules governing the emerging market economy tended to follow ex post changes in the informal business practices, and were therefore more in keeping with the real interests of political and economic actors.9 As in the former Soviet Union, however, efforts to reform state-owned enterprises through formal rule changes in China also proved largely ineffectual because, in part, ex ante changes in formal rules often ran counter to the vested interests and conflicting sources of legitimacy of the communist party organization entrenched in state-owned firms.

Nee and Lian’s dynamic game theory model (1994) of declining ideological and political commitment helps to explain the de-institutionalization of the communist party in departures from central planning in transition economies. The technological and military gap that grew during the Cold War between the advanced market economies and state socialist countries precipitated reform efforts by communist elites to narrow the gap through innovations that sought to incorporate in the institutional framework of central planning increased reliance on the market mechanism. But at the individual level of party bureaucrats and officials, the growth of economic and political markets increased the payoff for opportunism and malfeasance, which in turn sparked within close-knit groups of party members a group-based social dynamic leading to declining ideological and political commitment to the communist party. This is demonstrated in a tipping point model wherein opportunism and malfeasance among party members, initially small, eventually reaches a critical mass. The reform leaders in the party attempt to address the problem through campaigns aimed at punishing malfeasance.

Over time, however, declining commitment reaches a critical tipping point, precipitating demoralization and collapse of the communist party as an effective ruling organization. This in turn paves the way for de-institutionalization

7 For analyses of how institutional change by administrative design and formal rule change faltered in Eastern Europe and Russia, see e.g. Stark (1996), Gray and Hendley (1997), Hellman (1997), Varese (2001).

8 For analyses by economic sociologists of realignment of power and interests favoring economic actors in market transitions and institutional change in China, see e.g. Walder (1995), Nee (1996), Cao (2001), Guthrie (1999), Keister (2000).

9 See e.g. Shirk (1993); Naughton (1995); Opper, Wong and Hu (2002) for analyses of how economic and political actors benefited from institutional change.

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politicians in state-crafted institutional change oriented to building a market economy.

4. CONCLUDING REMARKS

By way of concluding we would first of all like to note that the sociological analysis of the nature of the relationships between networks, norms and large institutional structures in economic life is still at an early stage. As economic sociology refines and deepens its explanation of the nature of these relationships, it will necessarily draw on a variety of methodological and theoretical tools. Insights from cognitive science, game theory and computer simulation of the emergence, diffusion and transformation of norms and beliefs can all contribute to a deepened understanding of the micro-macro links. These methods can also contribute to a better understanding of the joint stabilizing impact of customs, conventions, norms, beliefs and interests.

Central to the research agenda of the new institutionalist approach that we are advocating is to bring comparative institutional analysis back into economic sociology. Much of this work to date has involved qualitative historical analysis of one or two cases. While such work has led to some important advances in understanding the relationship between institutions and economic behavior, the use of quantitative methods moving beyond case studies to engage systematic cross-national firm-level studies is indispensable in the attempt to specify and explicate how variable features of the institutional environment affect firms’ behavior in the global economy. Comparative institutional analysis of firm-centric data on sources of perceived costs in the institutional environment offers, for example, a promising approach to the measurement of transaction costs. Though transaction cost is the core theoretical concept of new institutional economics, economists have yet to measure this concept in a way that is useful for empirical analysis.10 As it refers to the costs stemming from uncertainty and information asymmetry embedded in social relations (e.g., the principal agent relationship), it is a concept of significant interest to sociologists as well. The development of standardized indexes of transaction costs arising from a variety of institutional sources (i.e., property rights, uncertainty, transparency of rules, resource dependence, bureaucracy, government regulation, state predation) using firm-centric data opens the way for a more differentiated account of how the institutional environment influences economic behavior.11 Economic sociologists can also fruitfully extend the ecological reasoning of organizational sociology to examine discrete patterns in institutional environments that support distinct organizational forms. For example, what features of the institutional

10North and Wallis (1986) estimated the size of the transaction sector of the American economy; however, their aggregate data is not very useful for empirical analysis.

11Firm-centric data, rather than aggregate national-level data, is needed to measure transaction costs, which are the costs to firms of negotiating, securing and completing economic transactions. The problem with national level aggregate data is that it does not measure the effect of variation in institutional conditions on the firm and entrepreneur.

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environment—“institutional ecology”—support modern public-owned corporations as opposed to the traditional family-owned firms in the global economy?

The idea of path dependence, imported into economics from the physical sciences, has deepened social science understanding of institutional change (Nelson and Winter 1982; David 1986; Arthur 1988). Path dependence refers to the lock-in effects stemming from initial conditions on subsequent development and change in the institutional environment. Economic historians have used this idea in a productive manner to explain the stability of institutions and the persistence of institutional arrangements that may later be inefficient for economic actors, given changes in relative prices (North 1990; Greif [1994] 1998). Hamilton and Feenstra (1998:173) show that the idea of path dependence is adumbrated in Weber’s theory of economic rationalization, which maintains that “entrepreneurial strategy is necessarily embedded in an array of existing economic interactions and organizations.” Further research is also needed to deepen understanding of path dependent institutional change and especially of the relationship between the persistence of informal institutional elements and change in formal rules (Nee and Cao 1999). It is the very stability of informal institutional elements—customs, networks, norms, cultural beliefs— that together with a distinct constellation of interestsaccount for path dependence in institutional arrangements.

There is also the important issue that Douglass North in his recent work has drawn our attention to in a forceful manner, namely that shared mental models play an important but neglected role in economic life. His main sources of inspiration in this enterprise have been recent advances in cognitive science and Hayek’s Sensory Order (e.g. Denzau and North 1994, Hayek 1952). To these sources we would like to add the century long attempt of Weberian-style sociology to introduce the perspective of the individual actor into the analysis in a stringent manner, which is known as “interpretive sociology” (Weber 1978; for an elaboration, see e.g. Schutz 1967). Weber was active long before the birth of modern cognitive science, but we would nonetheless argue that some of his ideas on this topic are still relevant. For a quick illustration we refer the reader toWeber’s well-known argument about the way that the mental models of religion may channel and direct economic actions in various ways. In Weber’s famous formulation:

Not ideas, but material and ideal interests, directly govern men’s conduct. Yet very frequently the ’world images’ [of religion] that have been created by ’ideas’ have, like switchmen, determined the tracks along which action has been pushed by the dynamic of interest. (Weber 1946:280)

Finally, just as economists may find it useful to incorporate the idea of networks into their models of the economy, so economic sociology can benefit from integrating economic ideas that are complementary to the modern sociological approach. Economic exchange, for example, can be seen as a specialized form of social exchange (Homans 1974:68); hence the mechanisms facilitating, motivating and governing social processes also extend to economic behavior. Crossdisciplinary trade with economics has been immensely useful to sociology in the

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past, as evident in the extensive borrowing from economics by the founders of modern sociology, and in the influence of imported ideas such as human capital, signaling and path dependence. New institutional economic sociology, we are convinced, is well positioned to benefit from and contribute to intellectual trade with economists, especially in light of their turn to sociology for understanding about the social dimension of economic life.

ACKNOWLEDGEMENT

We want to thank Claude M´enard both for his patience and for his inspiration to write this chapter. We draw on some of the material in Nee (forthcoming) and Swedberg (forthcoming), but also add to our joint theoretical argument about institutions and norms.

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30. Doing Institutional Analysis

Digging Deeper Than Markets and Hierarchies

ELINOR OSTROM

A major problem in understanding institutions relates to the complexity and diversity of contemporary life and the resulting specialization that has occurred within the social sciences. The central aim of the social sciences is to explain human behavior. But what kind of human behavior? Within which kinds of institutional settings?

As we go about our everyday life, we interact in a diversity of complex situations. Many of us face a morning and evening commute where we expect that others, who are traveling at great speeds, will observe the rules of the road. Our very lives depend on these expectations. Those of us who work in large organizations—universities, research centers, business firms, government offices—participate in a variety of team efforts. In order to do our own work well, we are dependent on others to do their work creatively, energetically, and predictably and vice versa.

Many of us play sports at noon-time, in the early evening, and on the weekends. Here, again, we need to learn the basic rules of each of the games we play, as well as finding colleagues with whom we can repeatedly engage in this activity. During the average week, we undertake activities in various types of market settings—ranging from buying our everyday food and necessities to investing funds in various types of financial instruments. And, we spend some hours each week with family and friends in a variety of activities that may involve worship, helping offspring with homework, taking care of our homes and gardens, and a long list of other activities undertaken with family and friends.

The formal study of institutions is typically divided into the study of separate kinds of situations. Students are confronted with the need to choose between the study of markets offered by Departments of Economics and the study of hierarchies or states offered by Departments of Political Science. The study of communities is sometimes offered in Anthropology or Sociology Departments, but may not be offered at all in some universities. Are markets and hierarchies entirely “different” structures? Do they, in turn, share little with families, neighborhoods, and committees? Are there no underlying universal building blocks of organized life analogous to the underlying universal building blocks of individual organisms?

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In this chapter, I address the question of whether underlying components of markets and hierarchies (and, many other complex situations) constitute the elemental parts of multiple, complementary theories that explain regularities in human behavior across diverse and complex situations. In other words, I assert that there are universal components of all markets and other frequently encountered situations and provide a framework that can be used in analyzing any type of institutional arrangement.

Contemporary ways of organizing scientific knowledge have not encouraged pursuing this question. Whole disciplines have been built up around the presumption that they offer a unique perspective on the study of particular types of situations. Markets and hierarchies are presented in some courses as fundamentally different “pure types” of organization. Not only are these types of institutional arrangements perceived to be different but each is presumed to require its own explanatory theory. Recent works in transaction cost economics do, of course, bridge these structures in the discussion of choosing firms or markets to organize activities (Williamson 1991).

When we study or teach about these situations, behavior is presented as coming from separate worlds. Psychologists tend to study the way that single individuals acquire and process information and skills and how this affects individual choices. The theories of individual behavior developed in psychology are little known or used outside of psychology. Many economists develop their own theories of individual behavior that are not consistent with the work undertaken in contemporary psychology. Political scientists tend to study various kinds of collective-choice mechanisms (legislatures, executives, courts, and the selection of officials through voting) and are eclectic in the theories and approach they use. The discipline of law is taught in separate schools and usually made available only to those interested in becoming lawyers by profession. Social scientists rarely take any biology—and vice versa—even though recent developments in biology are highly relevant for understanding human behavior.

In each discipline, a separate set of languages is emphasized that makes diverse assumptions about the

kinds of goals that individuals seek, the images they share, and the mechanisms they use in making decisions;

variables that are important in affecting the structure of the situations in which individuals make choices;

capabilities of individuals and the extent of freedom that individuals have to affect the structure of these situations; and

range of outcomes that is likely to be achieved in the relevant situations.

The development of separate languages is a barrier to more general explanatory frameworks and closely related theories that help analysts make crossinstitutional comparisons and evaluations.

What we have learned from all of our separate disciplinary work is that there is no single cause of human behavior—even though some scholars tend to push one or another all-encompassing cause such as poverty, population, or

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the division of labor. Even life itself is not dependent on one cause. To live, one needs at least oxygen, water, and minimum levels of nutrition. All of these are key parts of the explanation of life, but none is a sufficient explanation of living beings. Living beings also exist at multiple levels. The human genotype is a set of instructions for building human phenotypes. Natural selection processes operating primarily at an individual level, but also in multilevel processes, have selected for some genes and selected against others. Parsing the genetic code has been one of the major breakthroughs of contemporary scientific endeavors. Our biological foundations help to explain some aspects of all of our behavior, but much of our behavior is also affected by the structure of the diverse range of situations within which we interact with others.

After decades of moving further and further apart—and engaging in sometimes futile arguments about which discipline has the best approach to understanding human behavior—a very encouraging trend over the last several decades has been the growth of interdisciplinary approaches to the study of human behavior. The number of journals with two disciplines in the title has been growing:The Journal of Law and Economics, Political Sociology, Ecological Economics, and many others. The Public Choice Society was started in the 1970s—originally as the “no name society” by economists, political scientists, and sociologists (see V. Ostrom 1964). The International Association for the Study of Common Property was started in the mid-1980s to bring together anthropologists, economists, engineers, historians, political scientists, sociologists, and many others. The International Society for New Institutional Economics—while it has only economics in the title—includes a large number of noneconomists as key participants. This Handbook illustrates the diversity of formal disciplines that contribute to the study of institutions.

Thus, the time is ripe for an effort that attempts to draw on the foundations of many disciplines including anthropology, biology, economics, law, philosophy, political science, psychology, and sociology, to attempt to answer the core question of this chapter mentioned above. What are the underlying component parts that can be used to build useful theories of human behavior in the diverse range of situations in which humans interact? Can we identify the working parts of any kind of situation in which humans find themselves interacting on a repetitive basis? Can we use the same components to build an explanation for behavior in a commodity market as we would use to explain behavior in a university, or a religious order, or a transportation system, or an urban public economy? Can we identify the multiple levels of analysis needed to explain the regularities in human behavior that we observe? I give a positive answer to these questions based on years of work with colleagues developing the Institutional Analysis and Development (IAD) framework.1

The publication of “The Three Worlds of Action: A Metatheoretical Synthesis of Institutional Approaches” (Kiser and Ostrom 1982) represents the initial

1 For earlier discussions, see Kiser and Ostrom 1982; E. Ostrom 1986; Oakerson 1992; E. Ostrom, Gardner, and Walker 1994; Crawford and Ostrom 1995.

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3.Given the multiple languages used across disciplines, a coherent institutional framework is needed to allow for expression and comparison of diverse theories and models of theories applied to particular puzzles and problem settings.

4.Decisions made about rules at any one level are usually made within a structure of rules existing at a different level. Thus, institutional studies need to encompass multiple levels of analysis.

5.At any one level of analysis, combinations of prescriptions, attributes of the world, and communities of individuals involved work together in a configural, rather than an additive, manner.

Let us briefly discuss these issues.

Institutions are Invisible

One of the most difficult problems to overcome in the study of institutions is how to identify and measure them. Because institutions are fundamentally shared concepts, they exist in the minds of participants and sometimes are shared as implicit knowledge rather than in an explicit and written form. One of the problems facing scholars and officials is learning how to recognize the presence of institutions on the ground. The primitive physical structures that embed property-rights systems that farmers have constructed over time look flimsy to an engineer who considers only structures built out of concrete and iron to be real.4 These flimsy structures, however, are used by individuals to allocate resource flows to participants according to rules that have been devised in tough constitutional and collective-choice bargaining situations over time.

Unlike physical structures that are immediately visible on the horizon, rules are invisible structures that can be deeply buried under the regularities of observed behavior. We see, for example, the regularities of human behavior involved in an election campaign, an open farmers’ market, or among drivers on a major freeway. Many behavioral regularities result from the physical and technological world involved. The heavy use of television advertising in contemporary election campaigns in Western countries, for example, is due in part to the vast economies of scale involved in this mode of communicating. Some of what we see, on the other hand, results from rules. The rule that requires T.V. channels to give equal access to all candidates, the Equal Time Rule, affects the amount of broadcast time assigned to all candidates.

Multiple Definitions of Institutions

One of the most difficult problems to overcome in the study of institutions is how to identify and measure them. Because institutions are fundamentally

4 An excellent example of what looks like “flimsy structures” that have lasted for centuries is the Banaue Rice Terraces in the Philippines (rice terraces curved from the top of mountain ranges to the valleys below and maintained for over 2,000 years and still working today). UNESCO has put them on its World Heritage List. I am thankful to Ed Araral for suggesting this example.

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shared concepts, they exist in the minds of participants and sometimes are shared as implicit knowledge rather than in an explicit and written form. One of the problems facing scholars and officials is learning how to recognize the presence of institutions on the ground. The primitive physical structures that embed property-rights systems that farmers have constructed over time look flimsy to an engineer who considers only structures built out of concrete and iron to be real. These flimsy structures, however, are used by individuals to allocate resource flows to participants according to rules that have been devised in tough constitutional and collective-choice bargaining situations over time.

Unlike physical structures that are immediately visible on the horizon, rules are invisible structures that can be deeply buried under the regularities of observed behavior. We see, for example, the regularities of human behavior involved in an election campaign, an open farmers’ market, or among drivers on a major freeway. Many behavioral regularities result from the physical and technological world involved. The heavy use of television advertising in contemporary election campaigns in Western countries, for example, is due in part to the vast economies of scale involved in this mode of communicating. Some of what we see, on the other hand, results from rules. The rule that requires T.V. channels to give equal access to all candidates, the Equal Time Rule, ensures that we will observe states granting equal broadcast time to each candidate.

In training researchers to identify and measure institutions, we stress the concept of rules-in-use rather than focusing on rules-in-form. Rules-in-use are referred to whenever someone new (such as a new employee or a child) is being socialized into an existing rule-ordered system of behavior. They are the “do’s and don’ts” that one learns on the ground that may not exist in any written document. In some instances, they may actually be contrary to the “do’s and don’ts” that are written in formal documents. Being armed with a set of questions concerning how is X done here and why is Y not done here is a useful way of identifying rules-in-use, shared norms, and operational strategies.

Multiple Definitions of Institutions

It is hard to make much progress in the study of institutions if scholars define the term to mean almost anything. A major confusion exists between scholars who use the term to refer to an organizational entity such as the U.S. Congress, a business firm, a political party, or a family, and scholars who use the term to refer to the accepted rules, norms, and strategies adopted by individuals operating within or across organizational settings. In this chapter, following the definition used by Douglass North (1990, 2004 [this volume]), I use the term “institution” in the latter sense to refer to the rules, norms, and strategies used by humans in repetitive situations. By rules, I mean shared prescriptions (must, must not, or may) that are mutually understood and enforced in particular situations in a predictable way by agents responsible for monitoring conduct and for imposing sanctions (see Crawford and Ostrom 1995). By norms, I mean shared prescriptions known and accepted by most of the participants themselves

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involving intrinsic costs and benefits rather than material sanctions or inducements.5 By strategies, I mean the regularized plans that individuals make within the structure of incentives produced by rules, norms, and expectations of the likely behavior of others in a situation affected by relevant physical and material conditions.6

Multiple Levels of Analysis

When individuals interact in repetitive settings, they may be in operational situations that directly affect the world, or they may be making decisions at other levels of analysis that eventually impinge on operational decision-making situations (Shepsle 1989). Multiple sources of structure are located at diverse analytical levels as well as diverse geographic domains. Biologists took several centuries to learn how to separate the diverse kinds of relevant structures needed to analyze both communities and individual biological entities. Separating phenotypical structure from genotypical structure was part of the major neo-Darwinian breakthrough that allowed biologists to achieve real momentum and cumulation during the past century.

Besides multiple and nested action arenas at any one level of analysis, nesting of arenas also occurs across several levels of analysis. The nested structure of rules within rules, within still further rules, is a particularly difficult phenomenon to understand for those interested in institutions. Studies conducted at a macro level (see Kaminski 1992; V. Ostrom 1997; Loveman 1993; Sawyer 1992) tend to focus on a constitutional level of analysis (see below for further discussion of this level). Decisions made at this level affect collective-choice decisions as these impinge on the operational decisions of individuals (see Firmin-Sellers 1996; Agrawal 1998; Gibson 1999). Finding ways to communicate across levels is a key challenge for all institutional theorists.

Configural Relationships

Successful analysis can cumulate rapidly when scholars have been able to analyze a problem by separating it into component parts that are analyzed independently and then recombining these parts in an additive fashion. Many puzzles of interest to social scientists can be torn apart and recombined. Frequently, however, the impact on incentives and behavior of one type of rule is not independent of the configuration of other rules. Thus, the impact of changing one of the current rules that is part of a state “welfare system” depends on which other rules are also in effect. Changing the minimum outside-income that can be earned before losing benefits from one program, for example, cannot be analyzed

5 Norms are viewed by institutional analysts drawing on sociological traditions as social facts that are not changeable by the individual (see Seo and Creed 2002; Scott 2001).

6 When doing formal game-theoretical analysis, such strategies would be those identified as equilibrium strategies. Shared strategies may, however, take the form of heuristics adopted by most individuals in a society when they find themselves in particular situations.

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independently of the effect of income on benefits derived from other programs. Similarly, analyzing the impact of changing the proportion of individuals who must agree prior to making an authoritative collective choice (e.g., 50 percent plus 1) depends on the quorum rule in force. If a quorum rule specifying a low proportion of members is in effect, requiring two-thirds agreement may be a less stringent decision rule than a simple majority rule combined with a quorum rule requiring a high proportion of members. Ceteris paribus conditions are always essential for doing any theoretical work involving institutions. In the case of institutional analysis, one needs to know the value of other variables rather than simply asserting that they are held constant. This makes institutional analysis a more difficult and complex enterprise than studies of phenomena that are strictly additive.

2. INSTITUTIONAL FRAMEWORKS, THEORIES, AND MODELS

Given the need for multiple disciplines, and hence multiple disciplinary languages, and the multiple levels of analysis involved in studying configural relationships among rules, relevant aspects of the world, and cultural phenomenon, the study of institutions does depend on theoretical work undertaken at three levels of specificity that are often confused with one another. These essential foundations include (1) frameworks, (2) theories, and (3) models. Analyses conducted at each level provide different degrees of specificity related to a particular problem.

The development and use of a general framework helps to identify the elements and relationships among these elements that one needs to consider for institutional analysis. Frameworks organize diagnostic and prescriptive inquiry. They provide the most general list of variables that should be used to analyze all types of institutional arrangements. Frameworks provide a metatheoretic language that is necessary to talk about theories and that can be used to compare theories. They attempt to identify the universal elements that any theory relevant to the same kind of phenomena would need to include. Many differences in surface reality can result from the way these variables combine with, or interact with, one another. Thus, the elements contained in a framework help the analyst generate the questions that need to be addressed when first conducting an analysis. In this chapter, I will present a framework for institutional analysis rather than specific theories.

The development and use of theories enable the analyst to specify which elements of the framework are particularly relevant for certain kinds of questions and to make general working assumptions about these elements. Thus, theories focus on a framework and make specific assumptions that are necessary for an analyst to diagnose a phenomenon, explain its processes, and predict outcomes. Several theories are usually compatible with any framework. Economic theory, game theory, transaction cost theory, social choice theory, covenantal theory, and theories of public goods and common-pool resources are all compatible with the IAD framework discussed in this chapter.

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The development and use of models make precise assumptions about a limited set of parameters and variables. Logic, mathematics, game theory, experimentation and simulation, and other means are used to explore the consequences of these assumptions systematically on a limited set of outcomes. Multiple models are compatible with most theories. An effort to understand the strategic structure of the games that irrigators play in differently organized irrigation systems, for example, developed four families of models just to begin to explore the likely consequences of different institutional and physical combinations relevant to understanding how successful farmer organizations arranged for monitoring and sanctioning activities (Weissing and Ostrom 1991). This is one set of models we have developed to analyze, in a precise manner, a subpart of the theory of common-pool resources.

For policymakers and scholars interested in issues related to how different governance systems enable individuals to solve problems democratically, the IAD framework helps to organize diagnostic, analytical, and prescriptive capabilities. It is similar in structure and intent to the “Actor-Centered Institutionalism” framework developed by Renate Mayntz and Fritz Scharpf (1995) and applied to several national policy settings by Scharpf (1997). It also aids in the accumulation of knowledge from empirical studies and in the assessment of past efforts at reforms.

Without the capacity to undertake systematic, comparative institutional assessments, recommendations of reform may be based on naive ideas about which kinds of institutions are “good” or “bad” and not on an analysis of performance. One needs a common framework and family of theories in order to address questions of reforms and transitions. Particular models then help the analyst to deduce specific predictions about likely outcomes of highly simplified structures. Models are useful in policy analysis when they are well-tailored to the particular problem at hand. Models are used inappropriately when applied to the study of problematic situations that do not closely fit the assumptions of the model.

3. THE INSTITUTIONAL ANALYSIS AND

DEVELOPMENT (IAD) FRAMEWORK

As indicated earlier, an institutional framework should identify the major types of structural variables present to some extent in all institutional arrangements, but whose values differ from one type of institutional arrangement to another. In all the analyses presented in this chapter, one can think about a core set of building blocks—which are themselves constructed of other building blocks and affected by multiple external variables. The simplest and most aggregated way of representing all situations is shown in Figure 1, where actors in situations together with exogenous factors generate outcomes that affect the actors in the situation and potentially others (see E. Ostrom, Gardner, and Walker 1994: chap. 2).

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Figure 1. The focal level of analysis.

The outcomes that are achieved eventually feed back onto the actors and the situations and may transform both over time. When the outcomes are productive for those involved, they may increase their commitment to following the rules and norms that have evolved over time so as to continue to receive positive outcomes. When outcomes are perceived by those involved as of lower value than other outcomes that might be obtained, some actors will begin to raise questions about changing the structure of the situations through various changes in the exogenous variables or the structure of the situations themselves.

The IAD framework is a multitier conceptual map. The most basic schematic representation shown in Figure 1 will be unpacked, as shown in Figure 2. It can be further unpacked multiple times. The first step in using this framework to analyze a problem is to identify a conceptual unit—called an action arena— that can be utilized to analyze, predict, and explain behavior within institutional arrangements.7 Action arenas include an action situation and the actors in that situation. An action situation can be characterized using seven clusters of variables: (1) participants, (2) positions, (3) outcomes, (4) action-outcome linkages,

(5) the control that participants exercise, (6) information, and (7) the costs and benefits assigned to outcomes.

An actor (an individual or a corporate actor) includes assumptions about four clusters of variables:

1.the resources that an actor brings to a situation;

2.the valuation actors assign to states of the world and to actions;

3.the way actors acquire, process, retain, and use knowledge contingencies and information; and

4.the processes actors use for selection of particular courses of action.

7 The concept of an action arena is analogous to the concept of fields as used by Bourdieu (1977), DiMaggio and Powell (1983), and Fligstein (1998).

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Figure 2. A framework for institutional analysis.

Source: Adapted from E. Ostrom, Gardner, and Walker (1994: 37).

The particular assumptions made by an analyst about each of these assumptions enable one to build a theory of self-centered rational choice, a theory of bounded rationality, or a theory of norm-driven behavior. All of these theories can be used to animate the “actor” module of the framework.

An action arena refers to the social space where individuals interact, exchange goods and services, solve problems, dominate one another, feel guilty, or fight (among the many things that individuals do in action arenas). Considerable ferment has been generated during the past several decades as a result of empirical studies—to a large degree, experimental studies—that have challenged some of the basic working assumptions used by many institutional analysts in predicting outcomes in various types of collective-action situations (E. Ostrom 1998). A major proportion of theoretical work stops after predicting outcomes from a particular action arena and takes the variables specifying the situation and the motivational and cognitive structure of an actor as givens. Analysis proceeds toward the prediction of the likely behavior of individuals in such a structure.

An institutional analyst can take two additional steps after an effort is made to understand the initial structure of an action arena. One step digs deeper and inquires into the factors that affect the structure of an action arena. From this vantage point, the action arena is viewed as a set of variables dependent upon other factors. These factors affecting the structure of an action arena include three clusters of variables: (1) the rules and norms used by participants to order their relationships, (2) the attributes of states of the world that are acted upon in these arenas, and (3) the structure of the more general community within which any particular arena is placed (see Kiser and Ostrom 1982). The second step examines how nested levels of rules affect behavior. I will now provide a

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brief introduction to how shared understandings of rules, states of the world, and nature of the community affect the values of the variables characterizing action arenas (see the left side of Figure 2) and then turn to a discussion of the linkage of action situations.

4. EXPLANATION VIEWING ACTION SITUATIONS

AS DEPENDENT VARIABLES

Underlying the way analysts conceptualize action arenas are implicit assumptions about the rules individuals use to order their relationships, about attributes of states of the world and their transformations, and about the nature of the community within which the arena occurs. Some analysts are not interested in the role of these underlying variables and focus only on a particular arena whose structure is given. On the other hand, institutional analysts may be more interested in one factor affecting the structure of arenas more than they are interested in others. Sociologists tend to be more interested in how shared value systems affect the ways humans organize their relationships with one another. Environmentalists tend to focus on various ways that physical and biological systems interact and create opportunities or constraints on the situation human beings face. Political scientists tend to focus more on how specific combinations of rules affect incentives. Rules, states of the world, and the nature of the community all jointly affect the types of actions that individuals can take, the benefits and costs they attribute to these actions, and the likely outcomes achieved.

The Concept of Rules

The concept of rules is central to the analysis of institutions, but the term “rules” refers to many concepts with quite diverse meanings. In an important philosophical treatment of rules, Black (1962) identified four different usages of the term in everyday conversations. According to Black, the word “rule” is used to denote regulations, instructions, precepts, and principles. When used in its regulation sense, rules refer to something “laid down by an authority (a legislature, judge, magistrate, board of directors, university president, parent) as required of certain persons (or, alternatively, forbidden or permitted)” (ibid.: 115). The example of a rule in the regulation-sense that Black uses is: “The dealer at bridge must bid first.” When using rule in its regulation-sense, one can meaningfully refer to activities such as the rule “being announced, put into effect, enforced (energetically, strictly, laxly, invariably, occasionally), disobeyed, broken, rescinded, changed, revoked, reinstated” (ibid.: 109).

When the term “rules” is used to denote an instruction, it is closer in meaning to an effective strategy for how to solve a problem. An example of this usage is, “In solving quartic equations, first eliminate the cubic term” (ibid.: 110). When speaking about a rule in this sense, one would not talk about a rule being enforced, rescinded, reinstated, or any of the other activities relevant to

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regulation. When rule denotes a precept, the term is being used as a maxim for prudential or moral behavior. An example would be: “A good rule is: to put charity ahead of justice” (ibid.: 111). Again, one would not speak of enforcing, rescinding, or reinstating a rule in the precept sense.

The fourth sense in which the term rule is used in everyday language is to describe a law or principle. An example of this usage is: “Cyclones rotate clockwise, anticyclones anticlockwise” (ibid.: 113). Principles or physical laws are subject to empirical test, and as such, truth values can be ascribed to them. But physical laws are not put into effect, broken, or rescinded.

Social scientists employ all four uses of the term that Black identifies. Scholars engaged in institutional analysis usually use the term to denote a regulation. Rules in the instruction-sense can best be thought of as the strategies adopted by participants within ongoing situations. It is better to use the term “strategy” rather than “rule” for these plans of action. Rules in the precept-sense are part of the generally accepted moral fabric of a community. I refer to these cultural prescriptions as norms. Rules in the principle-sense are physical laws and are considered as part of the events in the biophysical world.

Until recently, rules have not been a central focus of most of the social sciences. Even in game theory, where “the rules of the game” seem to play an important role, there has not been much interest in examining where rules come from or how they change. Game-theoretical rules include all physical laws that constrain a situation as well as rules devised by humans to structure a situation. The rules of the game—including both physical and institutional factors—structure the game itself, but have been irrelevant to many game theorists once a game can be unambiguously represented. Anatol Rapoport stated this position clearly:

Rules are important only to the extent that they allow the outcomes resulting from the choices of participants to be unambiguously specified. . . . Any other game with possibly quite different rules but leading to the same relations among the choices and the outcomes is considered equivalent to the game in question. In short, game theory is concerned with rules only to the extent that the rules help define the choice situation and the outcomes associated with the choices. Otherwise the rules of games play no part in game theory. (1966: 18)

Rules are shared understandings about potentially linguistic entities (Ganz 1971; V. Ostrom 1980; Commons 1957) that refer to enforced prescriptions about what actions (or states of the world) are required, prohibited, or permitted. All rules are the result of implicit or explicit efforts to achieve order and predictability among humans by creating classes of persons (positions) who are then required, permitted, or forbidden to take classes of actions in relation to required, permitted, or forbidden states of the world (Crawford and Ostrom 1995; V. Ostrom 1991). Well-understood and enforced rules operate so as to rule out most occurrences of some actions.

Where do the rules that individuals use in action situations originate? In an open and democratic governance system, many sources of rules exist. It is not

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considered illegal or improper for individuals to self-organize themselves and craft their own rules if the activities they engage in are legal. In addition to the legislation and regulations of a formal central government, laws are considered passed by regional, local, and special governments. Within private firms and voluntary associations, individuals are authorized to adopt different rules for who is a member of the firm or association, how benefits are to be shared, and how decisions will be made. Each family constitutes its own rule-making body.

When individuals genuinely participate in the crafting of multiple layers of rules, some of that crafting will occur using pen and paper. Much of it, however, will occur as problem-solving individuals interact and try to figure out how to do a better job in the future than they have done in the past. Colleagues in a work-team are crafting their own rules when they say to one another: “How about if you do A and I do B in the future, and before we make a decision about C again, we both discuss it and make a joint decision.” In a democratic society, problem-solving individuals do this all the time.

Thus, rules need not be written. Nor, do they need to result from formal legal procedures. Participants craft rules in order to change the structure of repetitive situations that they face so as to try to improve outcomes for themselves. Regardless of a rule’s origin, however, it is always possible to rescind it or reinstate it—or it is not a rule.

Rules-in-use are the set of rules to which participants make reference if asked to explain and justify their actions to fellow participants. They are the “do’s and don’ts” that one learns on the ground that may not exist in any written document. In some instances, they may actually be contrary to the “do’s and don’ts” that are written in formal documents. While following a rule may become a “social habit,” it is possible to make participants consciously aware of the rules they use to order their relationships. Individuals can consciously decide to adopt a different rule and change their behavior to conform to such a decision. Over time, behavior in conformance with a new rule may itself become habitual (see Shimanoff 1980; Toulmin 1974; Harr´e 1974). The capacity of humans to use complex cognitive systems to order their own behavior at a relatively subconscious level makes it difficult for empirical researchers to ascertain what the working rules for an ongoing action arena may be.

In a system governed by a “rule of law,” the general legal framework in use will have its source in actions taken in constitutional, legislative, and administrative settings augmented by decisions taken by individuals in many different particular settings. In other words, the rules-in-form are consistent with the rules-in-use (Sproule-Jones 1993). In a system that is not governed by a “rule of law,” there may be central laws and considerable effort made to enforce them, but individuals attempt to evade rather than obey the law. Rule-following or conforming actions are not as predictable as biological or physical behavior explained by scientific laws. All rules are formulated in human language. As such, rules share problems of lack of clarity, misunderstanding, and change that typify any language-based phenomenon (V. Ostrom 1980, 1997). Words are always simpler than the phenomenon to which they refer.

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The stability of rule-ordered actions is dependent upon the shared meaning assigned to words used to formulate a set of rules. If no shared meaning exists when a rule is formulated, confusion will exist about what actions are required, permitted, or forbidden. Regularities in actions cannot result if those who must repeatedly interpret the meaning of a rule within action situations arrive at multiple interpretations. Because “rules are not self-formulating, self-determining, or self-enforcing” (V. Ostrom 1980: 342), it is human agents who formulate them, apply them in particular situations, and attempt to enforce performance consistent with them. Even if shared meaning exists at the time of the acceptance of a rule, transformations in technology, in shared norms, and in circumstances more generally change the events to which rules apply. “Applying language to changing configurations of development increases the ambiguities and threatens the shared criteria of choice with an erosion of their appropriate meaning” (ibid.).

The stability of rule-ordered relationships is also dependent upon enforcement (Gibson, Williams, and Ostrom 2005; Dietz, Ostrom, and Stern 2003). According to John R. Commons, rules “simply say what individuals must, must not, may, can, and cannot do, if the authoritative agency that decides disputes brings the collective power of the community to bear on said individuals” (1957: 138). Breaking rules is an option that is always available to participants in an action situation (as contrasted to players in a formal game), but associated with breaking rules is a risk of being monitored and sanctioned. If the risk is low, the predictability and stability of a situation are reduced. And, instability can grow over time. If one person can cheat without fear of being caught, others can also cheat with impunity. If the risk of exposure and sanctioning is high, participants can expect that others will make choices from within the set of permitted and required actions.

The simplifying assumption is frequently made in analytical theories that individuals in an action situation will take only those actions that are lawful given the rules that apply. For many purposes, this simplifying assumption helps the analyst examine important theoretical questions not related to how well the rules are enforced. Highly complicated games, such as football, can indeed be explained with more ease because of the presence of active and aggressive on-site referees who constantly monitor the behavior of the players and assign penalties for infraction of rules. And these monitors face real incentives for monitoring consistently and for applying fair and accepted penalties. Both the fans and the managers of the relevant sports teams may give a lot of attention to what the monitors are doing and the fairness of their judgments. In settings where a heavy investment is not made in monitoring the ongoing actions of participants, however, considerable difference between predicted and actual behavior can occur.

This is not to imply that the only reason individuals follow rules is because they are enforced. If individuals voluntarily participate in a situation, they must share some general sense that most of the rules governing the situation are appropriate. Otherwise, the cost of enforcement within voluntary activities becomes

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high enough that it is difficult, if not impossible, to maintain predictability in an ongoing voluntary activity. One can expect that it is usually difficult to maintain predictability in an ongoing activity where participants do not have the freedom to enter and leave the situation.

What rules are important for institutional analysis? A myriad of specific rules are used in structuring markets, hierarchies, committees, and other structures. Scholars have been trapped into endless cataloging of rules not related to a method of classification most useful for theoretical explanations. But classification is a necessary step in developing a science. Anyone attempting to define a useful typology of rules must be concerned that the classification is more than a method for imposing superficial order onto an extremely large set of seemingly disparate rules. The way we have tackled this problem using the IAD framework is to classify rules according to their impact on the elements of an action situation.

Rule Configurations

A first step toward identifying the working rules can be made, then, by overtly examining how working rules affect each of the components of an action situation listed above. A set of working rules that affect these variables should constitute the minimal but necessary set of rules needed to offer an explanation of actions and results based on the working rules used by participants to order their relationships within an action arena. Because states of the world and their transformations and the nature of a community also affect the structure of an action situation, working rules alone never provide both a necessary and sufficient explanation of the structure of an action situation and results.

Adopting this view of the task, seven groups of working rules can be said to affect the structure of any repetitive action situation, including markets, hierarchies, legislatures, common-property management systems, or competitive sports. These are: boundary rules, position rules, scope rules, authority rules, aggregation rules, information rules, and payoff rules. These seven groups of rules directly affect the seven components of an action situation.

Boundary rules directly affect the number of participants, their attributes and resources, whether they can enter freely, and the conditions they face for leaving. Position rules establish positions in the situation. Authority rules assign sets of actions that participants in positions at particular nodes must, may, or may not take. Scope rules delimit the potential outcomes that can be affected and working backwards, the actions linked to specific outcomes. Authority rules, combined with the scientific laws about the relevant states of the world being acted upon, determine the shape of the decision tree—the action-outcome linkages. Aggregation rules affect the level of control that a participant in a position exercises in the selection of an action at a node. Information rules affect the knowledge-contingent information sets of participants. Payoff rules affect the benefits and costs that will be assigned to particular combinations of actions

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Table 1. Rules used to structure open, competitive market situations

Position Rules

Positions of owner, seller, buyer, police, suspects, judge, and members of a jury are defined.

Boundary Rules

Licensing requirements for individuals to become buyers and sellers are minimal.

Buyers and sellers may enter and exit the market at their own initiative.

Authority Rules

Sellers are authorized to decide how many legally owned goods to offer for sale at a price.

Buyers are authorized to decide how much of a commodity to offer to buy at a price.

Police are authorized to arrest those suspected of unlawful use of goods owned by others.

Judges are authorized to determine rights and obligations of buyers and sellers in civil proceedings and of suspected thieves in criminal proceedings.

Members of juries are authorized to determine guilt or innocence of those accused of theft.

Scope Rules

Actors are limited in regard to the costs they can externalize on others. (Scope rules related to externalities vary substantially from market to market.)

Aggregation Rules

Whenever any two actors agree to exchange goods they own, that transaction occurs.

Police may make an arrest after a request or on their own initiative.

Decisions made by a judge must be final unless challenged in a higher court.

Members of a jury must vote before their decisions are official.

Information Rules

Prices of current offers to buy and sell must be made available.

No one is authorized to force information from others regarding preferences or costs.

In some jurisdictions, seller may be required to provide specific information on content of goods.

Payoff Rules

Seller retains profit, if any, after payment for inputs, interest, and taxes.

Buyer retains consumer surplus, if any, after payment for goods.

Suspects pay fines, or spend time in jail, if judged guilty of criminal acts.

Buyers and/or sellers pay damages and costs to other parties if ordered to do so by judge.

and outcomes and establish the incentives and deterrents for action. The set of working rules is a configuration in the sense that the impact on actions chosen and outcomes of a change in one rule may depend upon the specific content of other rules-in-use.

Table 1 presents a simplified set of rules that could be used to constitute an open, competitive market. When a scholar makes the statement, “Let us assume an open, competitive market,” the rules constituting a market are rarely enumerated. The statement, however, can be thought of as broadly encompassing the type of rules listed in Table 1. Substantial changes in any one of these rules affect the structure of a market and the resulting inferences that can be made about equilibria and market performance.

Change of only a few key rules would generate a situation that one would not call a market at all. A change in the aggregation rule, for example, which allocates goods to participants by officials, transforms the resulting action situation into something other than a market. (This is the rule that the military uses

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to assign uniforms to recruits.) A change in boundary rules affects the number of participants who enter and exit, and determines whether the resulting market is competitive, oligopolistic, or monopolistic. By affecting the structure of the market, changes in boundary rules affect predictions concerning the price at which goods will be sold, the quantity to be sold, and the relative distribution of producer and consumer surplus. Anderies (2002) uses these seven types of rules as initial steps in specifying a model of resource appropriation systems such as fisheries, rangelands, and forests. He then shows how changing position and boundary rules affects system dynamics over time.

Some colleagues are surprised at how many rules are needed to constitute a market. By simply manipulating the assumed components of action situations— e.g., the number of participants, the information they possess, the payoffs they face—a scholar using neoclassical economic theory is able to make predictions about probable interactions and outcomes that have considerable empirical support. Thus, for many aspects of theoretical and empirical research, we do not need to dig deeper than a set of assumptions about the structure of a particular type of situation.

When scholars, policy analysts, officials, and citizens try to change the structure of the action situations that exist in a particular firm, community, or region, however, they face a much more demanding task than simply “assuming law and order and an open, competitive market.” They are facing the problem of how to create such a market (or an innovative, efficient firm or a sustainably managed resource). As the cases in Shirley (2002) demonstrate, finding the rule configuration to enhance the performance of urban water systems in regard to efficiency and distribution to the poor residents of a city presents an immense challenge. Privatizing water supplies turns out not to be one policy option. Each of the six major cities studied developed different contractual arrangements as among producers, regulators, consumers, and citizens. The performance of the reformed systems varied substantially across measures as well as across cities.

Changing the rules of a planned economy so as to constitute effective open markets has also proved to be a major challenge since the fall of the Berlin Wall. Policies intended to create open markets in many “transitional economies” have constituted monopolies or oligopolies instead! Given the recent experiences of failed efforts to improve the economies of the developing countries and many of those of Eastern Europe, the importance of understanding the deeper levels of institutional analysis is becoming more obvious. Further, as empirical studies of the linkages between rule configurations and action situations have shown, the actual number of rules-in-use in many typical situations is immense. At least 27 different boundary rules are in use in different locations in the management of common-pool resources, for example (E. Ostrom 1999a: 511). Similarly, a large number of authority rules, information rules, and payoff rules have been identified. The set of identified rules is large enough that no analyst can perform a complete analysis of the structure of resulting situations devoid from all combinations of these rules.

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Consequently, the next frontier in doing institutional analysis is a much more self-conscious study of how rules combine with one another, as well as with the physical and material conditions and the nature of a community to create the situations in which participants interact. Janssen (2002) has taken major steps in opening that frontier with his analysis of lessons learned from languages and from immune systems for the study of resilient human-ecological systems. The use of agent-based models will enable scholars to tackle the study of complex adaptive systems in a coherent and cumulative manner.

Physical and Material Conditions

While a rule configuration affects all of the elements of an action situation, some of the variables of an action situation (and thus the overall set of incentives facing individuals in a situation) are also affected by attributes of the physical and material world. What actions are physically possible, what outcomes can be produced, how actions are linked to outcomes, and what is contained in the actors’ information sets are affected by the world being acted upon in a situation. The same set of rules may yield entirely different types of action situations depending upon the types of events in the world being acted upon by participants. These “events” are frequently referred to as the “goods and services” being produced, consumed, and allocated in a situation as well as the technology available for these processes.

The attributes of states of the world and their transformation are explicitly examined when the analyst self-consciously asks a series of questions about how the world being acted upon in a situation affects the outcome, action sets, actionoutcome linkages, and information sets in that situation. The relative importance of the rule configuration and states of the world in structuring an action situation varies dramatically across different types of settings. The rule configuration almost totally constitutes some games, like chess, where physical attributes are relatively unimportant. The relative importance of working rules to attributes of the world also varies dramatically within action situations considered to be part of the public sector. Rules define and constrain voting behavior inside a legislature more than attributes of the world. Voting can be accomplished by raising hands, by paper ballots, by calling for the ayes and nays, by marching before an official counter, or by installing computer terminals for each legislator on which votes are registered. However, in regard to organizing communication within a legislature, attributes of the world strongly affect the available options. The principle that only one person can be heard and understood at a time in any one forum strongly affects the capacity of legislators to communicate effectively with one another (see V. Ostrom 1987).

Considerable academic literature has focused on the effect of attributes of goods on the results obtained within an action situation. A key assumption made in the analysis of a competitive market is that the outcomes of an exchange are highly excludable, easily divisible and transferable, and internalized by those who participate in the exchange. Markets are predicted to fail as

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effective decision mechanisms when they are the only arena available for producing, consuming, or allocating a wide variety of goods that fail to meet the criteria of excludability, divisibility, and transferability. Market failure means that the incentives facing individuals in a situation where the rules are those of a competitive market, but the goods are not “private goods,” do not motivate individuals to produce, allocate, and consume those goods close to an optimal level.

Let us briefly consider here several attributes that are frequently used to distinguish goods and services that are more effectively provided by a variety of nonmarket rules. A full elaboration of attributes of goods cannot be developed in this chapter given space limitations (see E. Ostrom, Gardner, and Walker 1994). Goods that are generally considered to be “public goods” yield nonsubtractive benefits that can be enjoyed jointly and simultaneously by many people who are hard to exclude from obtaining these benefits. Common-pool resources yield benefits where beneficiaries are hard to exclude, but each person’s use of a resource system subtracts units of that resource from a finite total available for harvesting.

Excludability and the Free-Rider Problem

When it is difficult or costly to exclude beneficiaries from a good once it is produced, it is frequently assumed that such a good must be provided publicly, rather than privately. When the benefits of a good are available to a group, whether or not members of the group contribute to the provision of the good, that good is characterized by problems with excludability. Where exclusion is costly, those wishing to provide a good or service face a potential free-rider or collectiveaction problem (Olson 1965). Individuals who gain from the maintenance of an irrigation system, for example, may not wish to contribute labor or taxes to maintenance activities, hoping that others will bear the burden. This is not to say that all individuals will free-ride whenever they can. A strong incentive exists to be a free-rider in all situations where potential beneficiaries cannot easily be excluded for failing to contribute to the provision of a good or service.

When it is costly to exclude individuals from enjoying benefits from a common-pool resource or a infrastructure facility, private, profit-seeking entrepreneurs, who must recoup their investments through quid pro quo exchanges, have few incentives to provide such services on their own initiative. Excludability problems can thus lead to the problem of free-riding, which in turn leads to underinvestment in capital and its maintenance.

Public sector provision of common-pool resources or infrastructure facilities raises additional problems in determining preferences and organizing finances. When exclusion is low-cost to the supplier, preferences are revealed as a result of many quid pro quo transactions. Producers learn about preferences through the consumers’ willingness to pay for various goods offered for sale. Where exclusion is difficult, designing mechanisms that honestly reflect beneficiaries’ preferences and their willingness to pay is complex, regardless of whether the

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providing unit is organized in the public or the private sphere. In very small groups, those affected are usually able to discuss their preferences and constraints on a face-to-face basis and to reach a rough consensus. In larger groups, decisions about infrastructure are apt to be made through mechanisms such as voting or the delegation of authority to public officials. The extensive literature on voting systems demonstrates how difficult it is to translate individual preferences into collective choices that adequately reflect individual views (Arrow 1951; Shepsle 1979; Buchanan and Tullock 1962).

Another attribute of some goods with excludability problems is that, once they are provided, consumers may have no choice whatsoever as to whether they will consume. An example is the public spraying of insects. If an individual does not want this public service to be provided, there are even stronger incentives not to comply with a general tax levy. Thus, compliance with a broad financing instrument may, in turn, depend upon the legitimacy of the public-choice mechanism used to make provision decisions.

Subtractability of the Flow

Jointly used infrastructure facilities can generate a flow of services that is entirely subtractable upon consumption by one user; in other instances, consumption by one does not subtract from the flow of services available to others. The withdrawal of a quantity of water from an irrigation canal by one farmer means that there is that much less water for anyone else to use. Most agricultural uses of water are fully subtractive, whereas many other uses of water—such as for power generation or navigation—are not. Most of the water that passes through a turbine to generate power, for instance, can be used again downstream. When the use of a flow of services by one individual subtracts from what is available to others, and when the flow is scarce relative to demand, users will be tempted to try to obtain as much as they can of the flow for fear that it will not be available later.

Effective rules are required if scarce, fully subtractive service flows are to be allocated in a productive way. Charging prices for subtractive services obviously constitutes one such allocation mechanism. Sometimes, however, it is not feasible to price services. In these instances, some individuals will be able to grab considerably more of the subtractive services than others, thereby leading to noneconomic uses of the flow and high levels of conflict among users.

Allocation rules also affect the incentives of users to maintain a system. Farmers located at the tail end of an irrigation system that lacks effective allocation rules have little motivation to contribute to the maintenance of that system because they only occasionally receive their share of water. Similarly, farmers located at the head end of such a system are not motivated to provide maintenance services voluntarily because they will receive disproportionate shares of the water whether or not the system is well maintained (E. Ostrom 1996).

Consequently, for common-pool resources whose flows are highly subtractive, institutional arrangements related to the allocation of the flow of services

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are intimately tied to the sustainability of the resource. It is highly unlikely that one can achieve sustainability without careful attention to the efficiency, fairness, and enforceability of the rules specifying who can appropriate how much of the service flow, at what times and places, and under what conditions. Furthermore, unless responsibilities are linked in a reasonable fashion to benefits obtained, the beneficiaries themselves will resist efforts to insist that they take responsibilities.

Additional Attributes

In addition to these general attributes of physical and material conditions that affect the incentives of participants, resource systems are also characterized by a diversity of other attributes that affect how rules combine with physical and material conditions to generate positive or negative incentives. Whether resource units are mobile or stationary, and whether storage is available somewhere in a system, affect the problems that individuals governing and managing commonpool resources face (Schlager, Blomquist, and Tang 1994). The problems of regulating a lobster fishery, for example, are much simpler than those of regulating a salmon fishery. Similarly, allocating water in a predictable and efficient manner is easier to achieve when there is some storage in the system than when it is a run-of-the-river system.

If a natural resource system is renewable, such as many groundwater basins, the relevant time horizon for sustaining use is very long, and achieving appropriate rules may mean the difference between creating a sustainable conjunctive use system and destroying a groundwater basin. Devising an effective set of rules for regulating the use of an oil pool, on the other hand, involves determining an optimal path for mining a resource. The cost of withdrawing the last units of oil will be much higher if producers have not coordinated their withdrawal patterns. Since the oil field will eventually be used up, the lack of a future may not generate the incentives needed to achieve adequate regulation early in the development phase (Libecap 1978).

The size of a resource system can also have a major impact on the incentives facing participants. The length and slope of a main canal of an irrigation system not only affects the cost of its maintenance but also the strategic bargaining that exists between headenders and tailenders on an irrigation system (E. Ostrom 1996). Increasing the number of participants is associated with increased transaction costs. How steeply the costs rise depends, to a large extent, on the rules-in-use and the heterogeneity of the users.

The productivity, predictability, and patchiness of a resource affect the likelihood that private-property arrangements will be successful and enhances the likelihood that common-property arrangements will be necessary (Netting 1982). Similarly, the resilience of a multispecies ecosystem affects the sensitivity of the system to both the rules used to govern the particular system and to changes in economic or environmental conditions elsewhere (Holling 1994). These additional attributes are slowly being integrated into a body of coherent

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theory about the impact of physical and material conditions on the structure of the situations that individuals face and their resulting incentives and behavior. Analysts diagnosing resource problems need to be sensitive to the very large difference among resource settings and the need to tailor rules to diverse combinations of attributes rather than some assumed uniformity across all resources in a particular sector within a country.

Attributes of the Community

A third set of variables that affects the structure of an action arena relates to the community. The attributes of a community that are important in affecting the structure of an action arena include the norms of behavior generally accepted in the community, the level of common understanding potential participants share about the structure of particular types of action arenas, the extent of homogeneity in the preferences of those living in a community, and the distribution of resources among those affected. The term culture is frequently applied to this bundle of variables.

For example, when all appropriators from a common-pool resource share a common set of values and interact with one another in a multiplex set of arrangements, the probabilities of their developing adequate rules and norms to govern resources are much greater (Taylor 1987). The importance of building a reputation for keeping one’s word is important in such a community, and the cost of developing monitoring and sanctioning mechanisms is relatively low. If the appropriators from a resource come from many different communities and are distrustful of one another, the task of devising and sustaining effective rules is substantially increased.

Whether individuals use a written vernacular language to express their ideas, develop common understanding, share learning, and explain the foundation of their social order is also a crucial variable of relevance to institutional analysis (V. Ostrom 1997). Without a written vernacular language, individuals face considerably more difficulties in accumulating their own learning in a usable form to transmit from one generation to the next.

5. LINKING ACTION ARENAS

In addition to analysis that digs deeper into the factors affecting individual action arenas, an important development in institutional analysis is the examination of linked arenas (see McGinnis and Williams 2000). Whereas the concept of a “single” arena may include large numbers of participants and complex chains of action, most of social reality is composed of multiple arenas linked sequentially or simultaneously (Hooghe and Marks 2001).

When individuals wish to intervene to change the structure of incentives and deterrents faced by participants in socially constructed realities to guide (or control) participants toward a different pattern of results, they do so by attempting to

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change the rules individuals use to order their interactions within particular types of action arenas. Some interesting and important institutional arrangements for coordinating complex chains of actions among large numbers of actors involve multiple organizations competing with one another according to a set of rules. Markets are the most frequently studied institutional arrangements that achieve coordination by relying primarily on rule-governed, competitive relationships among organizations. Rule-governed competition among two or more political parties is considered by many analysts to be an important requisite for a democratic polity. Less studied, but potentially as important a means for achieving responsiveness and efficiency in producing public goods and services, are arrangements that allow rule-ordered competition among two or more potential producers of public goods and services.

All rules are nested in another set of rules that define how the first set of rules can be changed. The nesting of rules within rules at several levels is similar to the nesting of computer languages at several levels. What can be done at a higher level will depend on the capabilities and limits of the rules at that level and at a deeper level. Whenever one addresses questions about institutional change, as contrasted to action within institutional constraints, it is necessary to recognize the following:

1.Changes in the rules used to order action at one level occur within a currently “fixed” set of rules at a deeper level.

2.Changes in deeper-level rules usually are more difficult and more costly to accomplish, thus increasing the stability of mutual expectations among individuals interacting according to a set of rules.

As discussed briefly above, it is useful to distinguish three levels of rules that cumulatively affect the actions taken and outcomes obtained in any operational setting (Kiser and Ostrom 1982). Operational rules directly affect day-to-day decisions made by the participants in any setting. Collective-choice rules affect operational activities and results through their effects in determining who is eligible and the specific rules to be used in changing operational rules. Constitutional-choice rules affect operational activities and their effects in determining who is eligible and the rules to be used in crafting the set of collective-choice rules that in turn affect the set of operational rules. One can even think about a “meta constitutional” level underlying all the others that is not frequently analyzed. One can think of the linkages among these rules and related level of analysis as shown in Figure 3.

For most practical applications, three or four levels are enough, but there is no theoretical justification for any specific number of levels. For the purposes of formal theory, we may need to assume as long a series of layers as is needed until we hit rock bottom—the physical world. Very deep layering—even infinite layering—turns out to be needed in many aspects of formal theory. Game theorists, for example, have had to assume that the common knowledge needed for one to assume that there is a game is nested infinitely. “Information is common

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Figure 3. Levels of analysis and outcomes.

knowledge if it is known to all players, each player knows that all of them know it, and each of them knows that all of them know that all of them know it, and so forth ad infinitum” (Rasmusen 1989: 50). Thus, one can always assume that there are even more primitive rules underlying those that one is analyzing at any one level—thus our positing of a very general meta-constitutional level—until one gets to the constraints of a physical world.

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The participants in collective-choice games may be the same participants as in linked operational-choice games (as when all firms in an industry agree upon a particular industry standard that they will all use in manufacturing goods). Or, participants in collective-choice games may differ from those in operational games. They may, for example, be legislative representatives selected in electoral games (themselves part of the collective-choice level of action) to be the agents of a set of principals—the citizens engaged in a wide diversity of operational games that will be affected over time by legislative policies. Participants in the third level can, again, either be participants in the other two levels or not. And, participants in constitutional choices may not recognize that they are making a constitutional rule—they may be simply trying to fix a problem with the way that they have been making policy choices over the last several years.

At each level of analysis there may be one or more arenas in which the types of decisions made at that level will occur. In the collective-choice, constitutional, and meta-constitutional situations, activities involve prescribing, invoking, monitoring, applying, and enforcing rules (Lasswell and Kaplan 1950; Oakerson 1994). The concept of an “arena” as described earlier does not imply a formal setting, but can include such formal settings as legislatures and courts. Policymaking (or governance) regarding the rules that will be used to regulate operational-level choices is usually carried out in one or more collective-choice arenas as shown in Figure 3.

6. CONCLUSION

When a theorist chooses to analyze a situation at any particular level, he or she must assume that the institutional rules at that level are temporarily fixed for the purpose of analysis. These rules form a part of the structure of the situation rather than the solution to the game created by that structure. When the purpose of analysis is to understand the origin of the rules at one level, knowing the structure of the situation at the next higher level is essential for that enterprise. The equilibria achieved at one level are thus supported by equilibria that have been achieved at higher levels.8 Understanding the role of these nested levels does not, however, require that the analyst specify the full supporting infrastructure in eludicating how individuals are expected to behave at one level. Thus, assuming that there are multiple levels where decisions are made that affect actions at other levels actually greatly simplifies analysis rather than complicating it.

Some situations within any one of these levels may be simple enough that one can generate a clear and empirically supported prediction about outcomes.

8 The decisions reached by members of a legislature are not stable if opponents of these decisions win a majority of seats in future elections on promises that they will reverse earlier decisions or change the constitutions so as to make the decisions unconstitutional. The stability of decisions in complex modern institutions is dependent not only upon the preferences and procedures used to organize decision making in one arena but upon the entire nested set of arenas (Shepsle 1989).

Doing Institutional Analysis 845

One can do this, for example, in a highly competitive market producing goods characterized by low costs of exclusion and subtractability. Here, one can rely on well-tested results from prior theoretical and empirical work. It is usually much more difficult to predict results when one is analyzing a collective-choice or constitutional-choice situation as it impacts on an operational-level setting. Existing theoretical results are frequently not available for predicting results in an operational situation whose rules are being changed at a collective-choice level. When new and unanalyzed situations are created by the process of changing parts of a rule configuration, institutional analysis needs to proceed to undertake a deeper analysis of how participants view the new rules, how they come to understand them, how they will be monitored and enforced, and what types of individual actions and collective outcomes are produced. This is frequently a challenging, difficult, and complex theoretical and empirical task.

ACKNOWLEDGEMENTS

The author is appreciative of the support of the “Institutions Project” of the Resilience Alliance and the comments of two reviewers of an earlier draft of this manuscript. Patty Lezotte has once again done a wonderful job of editing the manuscript.

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