The Governance Triangle: Economic Interactions in Civil Society, the State, and the Market

Interactions in civil society – in firms, families, neighborhoods, identity groups, and other face-to-face settings – have in common that relationships are personal and enduring, and as a result, identity and other-regarding preferences are important motivations (for better or worse). Here we add civil society to markets and states as a third form of governance of the economy, creating the governance triangle. We provide evidence that themes related to civil society have assumed substantially greater importance in economic research since the 1970s. We use a standard principal-agent model of employment in private firms to reveal three characteristics of interactions in civil society: the role of face-to-face interactions, social norms, and the private exercise of power. We show that market failures and other coordination problems can sometimes be more successfully addressed by civil society than by state or market governance. Civil society may have comparative institutional advantage where information available to state and market actors is limited, restricting the reach of complete contracts and enforceable government regulations, conditional on conflicts of interest being modest. When based on us-versus-them forms of identity, however, civil society governance may promote preferences antithetical to a liberal and democratic society.