Chapter 3: Theories of institutional
change
❑Institutional theory seeks to explain both
individual and organizational behavior within
the framework of formal and informal rules,
norms, and structures.
❑A main research field of the institutional theory
is the analysis of how institutions change over
time.
❑ As a matter of fact, institutions can shape the
nature of change across different levels and
contexts, as well as themselves change in
character, behavior and effectiveness over time
and space.
Cont…
❑Institutional theory explains how institutions
influence individual and organizational
behavior, and how these institutions
themselves evolve over time.
❑Institutions are both shapers of change and
objects of change.
❑Institutional change occurs across various
levels (micro and macro) and contexts
(economic, political, social).
3.1 Approaches to Institutional Change
❑Building on the definitions by North (1990), Aoki
(2001, 2007), and Greif (2006), scholars view
institutions as systems of rules, norms, and shared
beliefs that structure social and economic
interactions.
❑However, these scholars also imply different
mechanisms of institutional change, which are
categorized by Kingston and Caballero (2009)
into three main theories of institutional
change:
1. Evolutionary approach/ Spontaneous
2. Designed based approach
3. Equilibrium perspective
THEORIES OF INSTITUTIONAL CHANGE
Evolutionary Designed-Based Equilibrium
Approach Approach(Intentional) Perspective (Belief-
(Spontaneous) Based)
Institutions evolve Institutions as self-
Institutions created
gradually through enforcing equilibria of
deliberately by actors
adaptive behavior & shared beliefs &
(policy, elites)
norms expectations
Bottom-up process Top-down process Change occurs when
Unintended evolution Planned reform equilibrium shifts due to
Driven by learning, Rational design Seeks belief or expectation
adaptation, norms efficiency change
1. Evolutionary (Spontaneous) Theories
❖ Institutional change is viewed as an evolutionary process
— gradual, adaptive, and decentralized (Kingston &
Caballero (2009).
❖ Change occurs through human behavior and interaction,
rather than through deliberate design.
❖ Institutions evolve spontaneously from individuals’
actions, such as:
✓Learning: people adjust behavior based on
experience.
✓Imitation: successful practices are copied by others.
✓Adaptation: actors modify behavior in response to
environmental or social shifts.
The result is the emergence of new rules and norms
without central coordination.
Cont…
Mechanism of Change
❖ Evolutionary change occurs through variation, selection,
and retention:
✓ Variation: new behaviors or rules appear through
experimentation or innovation.
✓ Selection: some practices prove more effective or acceptable
and spread.
✓ Retention: successful rules or norms persist and become
institutionalized.
Key Characteristics
➢ No central authority directs the process (no formal
legislative intervention).
➢ Institutions are outcomes of human action but not of
human design (Hayek).
➢ Evolutionary change depends on local interactions,
social learning, and adaptation to changing conditions.
3.2 Designed-based theories of institutional change
❑The designed-based approach views institutional
change as a centralized, intentional, and
collective-choice process.
❑Change occurs when rules are explicitly designed
and implemented by political or collective entities
such as the state, community, or organizations.
❑Institutional reform is thus a top-down process
involving deliberate rule-making, negotiation,
and bargaining.
Cont…
❑Institutional change results from collective
decision-making and political contracting, where
actors intentionally modify the “rules of the
game.”
❑It involves conflict, cooperation, and bargaining
among interest groups that seek to influence
institutional outcomes.
❑Formal rules—laws, constitutions, and policies—
play a key role in shaping this process.
Mechanism of Change
Cont…
❖ Change is achieved through a central authority or organized collective
that:
✓ Designs new rules or reforms existing ones.
✓ Negotiates and enforces these rules through legal and political institutions.
✓ Coordinates actors’ behavior using formal mechanisms (e.g., legislation,
policy frameworks).
Libecap’s (1989) analyzes the creation and transformation of property
rights institutions.
❖ Views rule-changing activity as a form of contracting among interested
parties.
✓ Institutional change is a “contracting game” governed by higher-level
political rules.
✓ These higher-level rules (e.g., constitutional or legal systems) influence how
lower-level rules (e.g., property rights) evolve.
Institutional outcomes depend not only on efficiency considerations but also
on power, interests, and bargaining among actors within political
frameworks.
Cont…
Key Characteristics
✓Planned and deliberate: Institutions are
purposefully created or reformed.
✓Collective and political: Change involves
negotiation among interest groups.
✓Hierarchical structure: Higher-level rules
constrain and direct lower-level ones.
✓Outcome: Institutional frameworks often
reflect political compromises and power
dynamics rather than pure efficiency.
3.2.1 The Efficiency View (Designed-Based Sub-
Approach)
❖ Institutional change is motivated by the goal of efficiency —
improving outcomes and reducing costs.
❖ Change occurs through rational design, focusing on optimizing
resource allocation and solving coordination problems.
❖ Institutions are treated as tools to maximize societal welfare or
reduce transaction costs.
Key Characteristics
❖ Rational actors: Individuals or groups aim to create rules that
are efficient.
❖ Formal mechanisms: Legal, economic, or administrative
reforms are implemented to improve institutional performance.
❖ Goal-oriented: The primary driver is efficiency, rather than
power or conflict.
Cont…
Examples
❖Reforming property rights to reduce disputes.
❖Introducing market regulations that improve
trade efficiency.
❖Designing organizational rules that minimize
bureaucratic inefficiency.
3.2.2 The Power (Distributive) Perspective
(Designed-Based Sub-Approach)
❖Institutional change reflects power relations
and the distribution of resources.
❖Rules are designed not only for efficiency but
also to benefit specific groups or resolve
conflicts over resources.
❖Emphasizes that political and economic actors
have competing interests, and institutional
change is often a negotiated or contested
outcome.
Cont…
Key Characteristics
❖ Conflict and bargaining: Change arises from
negotiation among actors with different power and
interests.
❖ Distributional effects: New rules may favor powerful
groups or coalitions.
❖ Political dimension: Institutions are shaped as much
by power struggles as by efficiency goals.
Examples
✓ Tax laws benefiting certain industries or social groups.
✓ Allocation of land or property rights favoring elites.
✓ Regulatory reforms influenced by lobbying or interest
groups.
3.3 Equilibrium Perspective on Institutional
Change
❑The equilibrium perspective views institutions as
self-enforcing systems of rules, norms, and shared
beliefs.
❑Institutional stability and change are analyzed in
terms of equilibria-situations where individuals’
expectations and behaviors are mutually consistent
Aoki (2001, 2007).
Cont…
❑Institutions persist because actors’ beliefs and
expectations are aligned.
❑Change occurs only when equilibrium is
disrupted by:
✓Shifts in social beliefs or perceptions
✓External shocks (economic, technological,
political)
✓Coordination failures or new opportunities
Cont…
Mechanism of Change
1. Stable Equilibrium: Institutions are maintained as
long as actors’ expectations are consistent.
2. Perturbation / Shock: Changes in environment,
beliefs, or strategies create instability.
3. Transition: Actors adjust behaviors in response to
new expectations.
4. New Equilibrium: A new set of rules, norms, or
conventions emerges and becomes self-enforcing.
Cont…
Key Characteristics
❑Focuses on coordination and expectations
rather than top-down design.
❑Institutional change is conditional occurs only
when old equilibria no longer satisfy
participants.
❑Highlights the path-dependent nature of
institutional evolution history and prior
choices affect possible outcomes.