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Institutional Traps and Transition

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  • Polterovich, Victor

Abstract

Two myths have harmed many economies throughout the world. One is the theory of absolute advantage of central planning over the market mechanism, and the other is the belief that efficient markets develop spontaneously and quickly enough if appropriate economic legislation is established. Volumes have been written to debunk the first myth. The falsity of the second needs to be better understood. The problem is that inside of any legislated change there exists a room for development of different institutions, or behavior norms, and it is not simple to predict which direction will be chosen by an economy. The hypothesis that efficient institutions must arise because of natural selection does not prove to be truthful. Inefficient development can be self-supporting and stable. The supporting mechanisms were systematically investigated by Arthur (1988) for technological changes. North (1990) pointed out that the same mechanisms plaid an important role in the evolution of institutions. A number of examples have been studied in different branches of economics. The most striking examples can be found in recent history of economic reforms in Russia and East European countries. This chapter uses the ideas by Arthur and North to describe a general scheme for the formation of inefficient yet stable norm or institutions, referred herein as institutional traps. The scheme is substantially based on the concepts of transaction costs, transformation costs, and transitional rent discussed below. Then the theory developed is applied to explain emergence in Russia of barter, mutual arrears, tax evasion, corruption, and some other institutional traps. Implications for reform strategy are explored. The analysis shows that the formation of institutional traps is a major risk in any reform process, and avoidance of these traps is an urgent task during transition.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20126.

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Date of creation: 1999
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Handle: RePEc:pra:mprapa:20126

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Related research

Keywords: arrears; barter; civic culture; civil society; coordination failures; corruption; institutional trap; multiple equilibria; path dependence; rent seeking; reputation; systemic crises; transaction costs; transformation costs; transitional rent; trust;

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  1. Tirole, Jean, 1996. "A Theory of Collective Reputations (with Applications to the Persistence of Corruption and to Firm Quality)," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 63(1), pages 1-22, January.
  2. Sato, Kazuo, 1990. "Indicative planning in Japan," Journal of Comparative Economics, Elsevier, vol. 14(4), pages 625-647, December.
  3. Polterovich, Victor, 1995. "Towards the Theory of Privatization," MPRA Paper 20151, University Library of Munich, Germany.
  4. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
  5. Cazes, Bernard, 1990. "Indicative planning in France," Journal of Comparative Economics, Elsevier, vol. 14(4), pages 607-620, December.
  6. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1320-1346, September.
  7. de Melo, Martha & Denizer, Cevdet & Gelb, Alan & Tenev, Stoyan, 1997. "Circumstance and choice : the role of initial conditions and policies in transition economies," Policy Research Working Paper Series 1866, The World Bank.
  8. Lui, Francis T., 1986. "A dynamic model of corruption deterrence," Journal of Public Economics, Elsevier, Elsevier, vol. 31(2), pages 215-236, November.
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