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Norms and Institution Formation

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  • Francois, Patrick

Abstract

This paper analyzes the dynamic interaction between norms - internalized restraints on opportunistic behaviour - and institutions - restraints on such behaviour deriving from external enforcement. When individuals following a norm suffer pecuniary losses to doing so, the norm is eroded. Institutions, on the other hand, are strengthened when institution designers are rewarded for improving them. The dynamic interaction between these two factors leads to both good steady states with functioning institutions, widespread norm compliance, and trade, and bad steady states where trade breaks down, institutions are dysfunctional and beneficial norms are violated. The model here shows the situations that lead economies to converge on good steady states rather than bad ones; why countries with a history of institutional success are more likely to be successful in future, why countries with a history of failure will require better institutions to achieve even the same level of compliance, and why functional institutions may not be readily transplated from successful to unsuccessful countries.

Suggested Citation

  • Francois, Patrick, 2008. "Norms and Institution Formation," CEPR Discussion Papers 6735, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6735
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    References listed on IDEAS

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    Cited by:

    1. Marianna Belloc & Samuel Bowles, 2009. "International Trade, Factor Mobility and the Persistence of Cultural-Institutional Diversity," UMASS Amherst Economics Working Papers 2009-08, University of Massachusetts Amherst, Department of Economics.
    2. Sangnier, Marc, 2013. "Does trust favor macroeconomic stability?," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 653-668.
    3. Francois, Patrick & van Ypersele, Tanguy, 2009. "Doux Commerces: Does Market Competition Cause Trust?," CEPR Discussion Papers 7368, C.E.P.R. Discussion Papers.
    4. Nathan Nunn & Leonard Wantchekon, 2011. "The Slave Trade and the Origins of Mistrust in Africa," American Economic Review, American Economic Association, vol. 101(7), pages 3221-3252, December.
    5. Adriani, Fabrizio & Sonderegger, Silvia, 2009. "Trust, Introspection, and Market Participation: an Evolutionary Approach," MPRA Paper 16110, University Library of Munich, Germany.

    More about this item

    Keywords

    Economic Development; Institutional Change; Social Norms;

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • Z10 - Other Special Topics - - Cultural Economics - - - General

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