Institutional Resilience and Economic Systems

Dragos Paul AligicaVlad Tarko

George Mason University, Mercatus Center

Association of Private Enterprise Education 2013

Outline

• What is resilience?• The role of institutions• Highly Optimized Tolerance• Resilience by adaptability• Polycentricity as the framework for

adaptability

Resilience

• Institutional resilience is the ability of a social system (society, community, organization) to – react and adapt to abrupt challenges

(internal or external) and/or – avoid gradually drifting along

destructive slippery slopes.

The role of institutions

• Innovation is endogenous• Non-renewable & non-abundant

resources– The Red Queen metaphor

Highly Optimized Tolerance

• Experience & Data -> estimations of risk

• Efficient prevention:– Allocate resources for prevention based

on expected damage– The system of rules gets more complex– Vulnerabilities to uncertainty,

unexpected sources of damage

Resilience by adaptability

• Ability to react to new challenges, rather than predict them

• Why systems fail? Monitoring and enforcement problems:– Incentive problems– Knowledge problems:

Institutional complexity

• Ostrom (2008):– “Given the logic of combinatorics, it is

impossible for public officials or for direct beneficiaries to conduct a complete analysis of the expected personal benefits or broader performance of all of the potential rule changes that could be made by the individuals served by a self-organized resource governance system trying to improve its performance. A similar impossibility also exists for biological systems – they evolve.”

Causes of institutional failure

• Constanza, Low, Ostrom and Wilson (2001) :–Missing Institutions– Scale Mismatches • Missing Connections: decision making

linkages between scales are ineffective. • Incorrect Scale of Information: decisions

are based on information aggregated at the wrong scale, even though information may exist at the appropriate scale.

Polycentricity

• Multiple independent decision centers– Competing at the same scale– Different functions at different scales

• Over-arching system of rules:– Domains of universality– Domains of acceptable variance and

diversity

• Good system of rules:– Spontaneous order