The Theory of Institutions
Randall Calvert
Fall 1995 (PSC 588)
Overview
Institutions are enduring systems of social constraint on human behavior. Through such
constraint, human society achieves "order," such as when the enforcement of laws against theft
effectively protect property rights. These constraints are not merely negative, however, as
illustrated by two examples. First, an appropriate system of property rights makes possible
contracting, investment, and economic development; institutions make can make it possible to
commit oneself to complex acts of exchange, vastly expanding the opportunities available to
members. Second, the existence of a language, which is a basic form of social institution, makes
it possible to communicate with other people, and thus to exchange information and to
coordinate activities, to the mutual advantage of all the communicators; institutions define
common expectations that enlarge the set of available actions people can take.
Although we will briefly survey diverse ideas about the nature of institutions, the course is
concerned primarily with the treatment of institutions in rational actor theories. Despite the title
of this course, there is no generally recognized "theory of institutions" abroad in the discipline;
we will be engaged in inventing one. Our central focus will be on the question of how
institutional constraints can be maintained when actors are rational, and have at most only an
instrumental interest in the institution for its own sake. The major theme of the course is that
institutions themselves should be viewed as equilibria of rational behavior. A solid
understanding of the theory of institutions from this standpoint should equip students both to
make original theoretical contributions at an important new research frontier, and to formulate
and address empirical and normative research questions on political institutions with a powerful
set of conceptual tools.
Usually this course has Game Theory as a prerequisite. This year, however, special
circumstances have dictated that we learn what we need as we go along. Early in the semester we
will take a break from the Theory of Institutions in order to cover some game-theoretic
preliminaries, and I will try to keep you posted in advance on any new concepts we'll need for
the readings. As before, most of the course will be built around game-theoretic ideas and
techniques.
Course Outline
All readings are required, except as noted. I expect all students to have read the required readings
before coming to the class for which they are assigned. Please note that this practice differs from
the one common to our graduate Economics courses; we will not necessarily make an effort to
cover all important assigned material at the blackboard, but that material is still important, and
relevant questions should be raised in the session for which the reading is assigned. I provide the
following survey as a partial roadmap to my view of the subject of this course: [recommended:]
Randall Calvert, "The Rational Choice Theory of Social Institutions: Cooperation, Coordination,
and Communication." In J. Banks and E. Hanushek, eds., Modern Political Economy: Old
Topics, New Directions (Cambridge University Press, 1995).
1. Institutions: Definitions, Problems, and Tools
1.1 The Idea of Institutions in Social Science (Sept. 8, 15)
What are institutions, and (how) do they matter? Definitions of social order, institutions, rules,
norms, and culture. Why a theory of institutions is needed. Individual action and social context.
Social choice instability vs. noncooperative-game equilibrium. Also, some important questions
that are based on notions about social and political institutions.

What are institutions? (to be covered in introductory session, Sept. 8)
- Political science views
1. David B. Truman, The Governmental Process, 2nd edition (New York: Alfred A.
Knopf, 1971) (first edition, 1951), chapter 2 -- pages 23-33 only, required; whole
chapter, recommended.
2. [recommended:] Jackson, ed., Institutions in American Society (1990),
Introduction and Chapter 1 (especially pages 9-22).
3. Kathleen Thelen and Sven Steinmo, "Historical Institutionalism in Comparative
Politics" (pages 1-13 required; whole chapter recommended). In Steinmo, Thelen,
and Longstreth, eds., Structuring Politics: Historical Institutionalism in
Comparative Analysis (Cambridge, 1992).
- Sociological views
1. Emile Durkheim, The Rules of Sociological Method (Preface to the Second
Edition, 1913, sections II and III, pp. 38-46 of the 1982 volume edited by Steven
Lukes).
2. James March and Johan Olsen, Rediscovering Institutions: The Organizational
Basis of Politics (1989), chapter 2 (pp. 21-28, 38).
- Economic views
1. [recommended:] Douglass North, Institutions, Institutional Change, and
Economic Performance (Cambridge, 1990), chapter 1. (See also the North reading
in part (c.) below.)
2. [recommended:] Thrainn Eggertsson, Economic Behavior and Institutions
(Cambridge, 1990), chapter 1.

The problem of social order (to be covered in introductory session, Sept. 8)
1. Friedrich Hayek, Law, Legislation, and Liberty. Vol. I: Rules and Order (Univ.
Chicago Press, 1973): Chapter 2, "Cosmos and Taxis," pages 35-38, required;
pages 38-54, recommended.
2. [recommended:] Jon Elster, The Cement of Society: A Study of Social Order
(Cambridge, 1989). Introduction (pages 1-16).
3. Talcott Parsons, The Social System (Free Press, 1951), pages 3-6 only.

Institutions and economic performance (Sept. 15)
1. North, "Institutions and Their Consequences for Economic Performance," in Cook
and Levi, eds., The Limits of Rationality (Univ. of Chicago Press, 1990): 383401.

Social choice theory and spatial modeling (Sept. 15)
1. [recommended:] McKelvey, "Intransitivities in Multidimensional Voting Models
and Some Implications for Agenda Control," Journal of Economic Theory (1976):
472-82.
2. Shepsle, "Institutional Arrangements and Equilibrium in Multidimensional Voting
Models," American Journal of Political Science 23 (1979): 27-59.
3. Riker, "Implications from the Disequilibrium of Majority Rule for the Study of
Institutions," American Political Science Review 74 (1980): 432-5.


Constitutions and political order (Sept. 15)
1. James M. Buchanan, "The Constitution of Economic Policy." Science 237 (1987):
1433-37.
2. Robert D. Putnam, Making Democracy Work: Civic Traditions in Modern Italy
(Princeton, 1993). Chapter 6, "Social Capital and Institutional Success" (pp. 163185).
Language and meaning (Sept. 15)
1. Donald Davidson, "Toward a Unified Theory of Meaning and Action." Grazer
Philosophische Studien 11 (1980): 1-12.
2. Paul Grice, Studies in the Way of Words (Harvard, 1989), chapters 2 (pp. 22-31
only) and 5 (pp. 86-105 only).
1.2. Game-Theoretic Preliminaries (Sept. 22)

Noncooperative games and Nash equilibrium (special meeting Sept. 20, 4:00-6:00)
1. Jean Tirole, The Theory of Industrial Organization (MIT Press, 1988), chapter 11,
"Noncooperative Game Theory: A User's Manual." Omit subsections 11.5.2
through 11.5.4.
 Games of coordination, cooperation, and communication; multiple equilibria; signaling
and cheap talk
1. Thomas C. Schelling, The Strategy of Conflict (1960), chapters 3-4.
2. Michael Taylor, The Possibility of Cooperation (Cambridge, 1987), chapters 1
(pp. 1-20 only) and 3.
3. Joseph Farrell, "Cheap Talk, Coordination, and Entry". Rand Journal of
Economics 18 (1987): 34-39.
4. Thomas Gilligan and Keith Krehbiel, "Organization of Informative Committees
by a Rational Legislature." American Journal of Political Science 34 (1990): 53164.

The folk theorem
1. Drew Fudenberg and Eric Maskin, "The Folk Theorem in Repeated Games with
Discounting and with Incomplete Information". Econometrica 54 (1986): 533-545
(the "discounting" part) only.
2. Rational Choice under Institutional Constraints
2.1 Transaction costs; contracting around institutions (Sept. 29)
1. [recommended:] Jay B. Barney and William G. Ouchi, "Transaction Cost Economics:
Governing Economic Exchanges." In Barney and Ouchi, eds., Organizational Economics
(Jossey-Bass, 1986).
2. Ronald Coase, "The Nature of the Firm," Economica 4 (1937): 386-405. Reprinted in
Barney and Ouchi, ibid.: 80-98.
3. Oliver Williamson, "Transaction-Cost Economics: The Governance of Contractual
Relations," Journal of Law and Economics 22 (1979): 233-261. Reprinted in Barney and
Ouchi, ibid.: 98-129.
4. Ronald Coase, "The Problem of Social Cost," Journal of Law and Economics 3 (1960):
1-44.
5. Harold Demsetz, "When Does the Rule of Liability Matter?" Journal of Legal Studies 1
(1972): 13-28.
2.2 Fixed legislative institutions (Oct. 6)
1. Barry R. Weingast and William Marshall, "The Industrial Organization of Congress."
Journal of Political Economy 96 (1988): 132-63.
2. Kenneth A. Shepsle and Barry R. Weingast, "The Institutional Foundations of Committee
Power," American Political Science Review 81 (1987): 85-104.
3. Keith Krehbiel, Kenneth A. Shepsle, and Barry R. Weingast, "Controversy: Why are
Congressional Committees Powerful?" American Political Science Review 81 (1987):
929-45.
3. Institutions as Equilibria
3.1 A repeated-game model of institutions (Oct. 13)
1. Andrew Schotter, An Economic Theory of Institutions (1981), chapters 1 & 2.
2. Randall Calvert, "Rational Actors, Equilibrium, and Social Institutions." Photocopy,
1992. Forthcoming in J. Knight and I. Sened, eds., Explaining Political Institutions (Univ.
of Michigan Press).
3.2 Markets (Oct. 13)
1. Paul Milgrom, Douglass North, and Barry Weingast, "The Role of Institutions in the
Revival of Trade: The Law Merchant, Private Judges, and the Champagne Fairs",
Economics and Politics 2 (1990).
2. Avner Greif, Paul Milgrom, and Barry Weingast, "Coordination, Commitment, and
Enforcement: The Case of the Merchant Guild." Journal of Political Economy 102
(1994): 745-76.
3.3 Legislatures (Oct. 20)
1. David P. Baron and John A. Ferejohn, "Bargaining in Legislatures." American Political
Science Review 83 (1989): 1181-1206.
2. David P. Baron, "A Noncooperative Theory of Legislative Coalitions." American Journal
of Political Science 33 (1989): 1048-1084.
3. David P. Baron, "A Spatial Bargaining Theory of Government Formation in
Parliamentary Systems." American Political Science Review 85 (1991): 137-164.
3.4 Constitutions (Oct. 27)
1. Russell Hardin, "Why a Constitution?" in B. Grofman and D. Wittman, eds., The
Federalist Papers and the New Institutionalism (Agathon Press, 1989).
2. Jeffrey Banks and Randall Calvert, "A Battle of the Sexes Game with Incomplete
Information", Games and Economic Behavior (1992).
3.5 Aspects of Social Order (Nov. 3)
1. Michael Hechter, Debra Friedman, and Satoshi Kanazawa, "The Attainment of Global
Order in Heterogeneous Societies." Photocopy, 1992. [In J.S. Coleman and T. Farro, eds.,
Rational Choice Theory: Advocacy and Critique (Sage)?]
2. Edward J. Bird, "The Decay of Social Norms: Implications for Income Support Policy."
Photocopy 1995.
3.6 Culture (Nov. 3)
1. John A. Ferejohn, "Rationality and Interpretation: Parliamentary Elections in Early Stuart
England", chapter 11 in K.R. Monroe, ed., The Economic Approach to Politics (New
York: Harper Collins, 1991). How culture and interpretivism are consistent with gametheoretic equilibrium.
2. Avner Greif, "Cultural Beliefs as a Common Resource in an Integrating World",
photocopy, Stanford University (1991).
3. David Kreps, "Corporate Culture and Economic Theory", in Alt and Shepsle, eds.,
Perspectives on Political Economy (1990).
4. James Johnson, "On the Cultural Dimensions of Rational Choice Theory."
3.7 Language (Dec. 1)
1. Joseph Farrell, "Meaning and Credibility in Cheap Talk Games." Games and Economic
Behavior 5 (1993): 514-31.
2. Hyun Song Shin and Timothy Williamson, "How Much Common Belief is Necessary for
a Convention?" Photocopy, 1994.
4. Emergence of Institutions
4.1 Selecting among multiple equilibria through fully rational play (Dec. 6)
1. Jack Knight, Institutions and Social Conflict (Cambridge, 1992), chapter 2 (pp. 21-47)
and pp. 123-151 of chapter 5.
2. Vincent Crawford and Hans Haller, "Learning How to Cooperate: Optimal Play in
Repeated Coordination Games." Econometrica 58 (1990): 571-95.
4.2 Selection through partial ratAdjustment mechanisms: evolution and learning (Dec. 8)
1. Robert Axelrod, "More Effective Choice in the Prisoner's Dilemma," Journal of Conflict
Resolution 24 (1980): 379-403.
2. H. Peyton Young, "The Evolution of Convention." Econometrica 61 (1993): 57-85.
3. Vincent P. Crawford, "Adaptive Dynamics in Coordination Games." Econometrica 63
(1995): 103-43.
4.3 Optional session: communication models in the selection of equilibria through play (week of
Dec. 11-16?)
1. Matthew Rabin, "A Model of Pre-game Communication." Journal of Economic Theory
63 (1994): 370-91.
2. Yong-Gwan Kim and Joel Sobel, "An Evolutionary Approach to Pre-Play
Communication." Econometrica 63 (1995): 1181-93.