The design of incentive systems is a central issue in the economics of organization. This paper argues that very often the ideal incentive systems to use within firms will involve low-powered incentives. Five particular circumstances leading to weak incentives being optimal are examined.

Reconstruction involves military occupation with the aim of rebuilding and reforming both formal and informal institutions along liberal democratic lines. We contend that successful reconstructions require mechanisms that make reforms credible over the long run. In the absence of a signal of sustained credible commitment, institutional reforms will not be trusted by the populace resulting in the failure of the broader reconstruction. The incentive and epistemic aspects of the credible commitment problem are analyzed. We also consider potential solutions to the problem of credible commitment. Absent such solutions, attempts to ‘export’ institutions via military occupation will fail or produce dysfunctional outcomes. An analysis of the numerous aspects of the credibility problem in the current reconstruction of Iraq is provided to illuminate the central arguments.

Corruption is widely believed to have an adverse effect on the economic performance of a country. However, many East-and-Southeast-Asian countries either achieved or currently are achieving impressively rapid economic growth despite widespread corruption – the so-called East-Asian-Paradox. A common feature of these countries was that they were autocracies. We re-examine the corruption-growth relationship, in light of the East-Asian-Paradox. We examine the role of political regimes, in mediating corruption–growth relationship using panel data over 100 countries for the period 1984–2016. We find clear evidence that corruption–growth relationship differs by the type of political regime, and the growth-enhancing effect of corruption is more likely in autocracies than in democracies. The marginal effect analysis shows that in strongly autocratic countries, higher corruption may lead to significantly higher growth, while this is not the case in democracies. Alternatively, democracy is not good for growth if there is a high level of perceived corruption. We provide suggestive evidence that the mechanism by which corruption is growth-enhancing in autocracies is through the perceived credibility of the commitment of ruling political elites to economic freedom, thereby providing confidence to the firms to invest, leading to long-term growth.

This essay contemplates the possible futures of evolutionary economics in terms of two contrasting images. In the first, the primary research emphasis of the future will continue to be on the topics that have interested evolutionary economists in the past, such as technological change, business behavior, and the role of institutions. Research contributions in these focal areas and in some related areas are briefly characterized. In the second image, there is a breakout from this ‘beachhead’ and a broader conflict with the reigning paradigm, neoclassical economics. Thomas Kuhn's theory of scientific revolutions provides a framework and stimulus for thinking about the latter case, and the 20th century paradigm conflict in physics provides a baseline for thinking about it. The core strengths of evolutionary economics in the paradigm conflict are noted, and the evolutionary role of intentionality is examined No definitive prediction about the future is offered.

Legal reforms that improve the security of private property rights to land have characteristics of a public good with dispersed benefits. However, nothing ensures that the state will provide property protection as a public good. Some states provide property protection selectively to powerful groups. Others are unable to provide property protection. In this paper, we argue that whether the state provides property protection as a public good, selectively, or cannot establish private property rights depends on the following features of politics: political stability, government capacity to administer and enforce private property rights, constraints on political decision-makers, and the inclusivity of political and legal institutions. We illustrate the theory using evidence from reforms that increased opportunities to privately own land in the US from the late eighteenth through nineteenth centuries, selective enforcement of land property rights in China, and the absence of credible legal rights to land in Afghanistan.

Hernando de Soto attributes the poor economic performance of developing countries to insecure property rights. When property rights are not well-defined individuals do not have the incentives to invest in capital, and assets cannot be used as collateral, hindering capital formation and economic growth. This paper tests de Soto's hypothesis empirically by examining how the security of property rights impacts wealth, collateral, and capital formation across nations. Using several different measures and model specifications, we find support for de Soto's conjecture. Our results suggest that better defined property rights would result in substantial improvements in capital formation and economic growth in developing countries.

Ha-Joon Chang, in his article ‘Institutions and Economic Development: Theory, Policy and History’, raises doubts about the effects of institutions on economic development and questions the positive effects of entirely free markets based on secure private property rights. We respond by stressing that institutions structure the incentives underlying individual action, secure private property rights are indispensable for prosperity, institutions have a first-order effect whereas policies only have a second-order effect, successful institutional change comes from within a society, and, given the status quo of developing countries, first-world institutions are likely not to be available to them.

This paper situates Elinor Ostrom's work on common-pool resource management in the tradition of ‘robust political economy’. Ostrom's analysis of bottom-up governance institutions is shown to recognise that such arrangements though imperfect are better placed to cope with bounded rationality and incentive compatibility problems in the management of smaller- and medium-scale common-pool resources. While Ostrom's work provides an analytical framework to explain the success of these arrangements, however, the paper argues that it lacks a robust account of when, if ever, top-down governance arrangements are to be preferred.

Why do economic agents conform with existing institutions? Drawing on economics and organizational institutionalism, this article identifies existing explanations, extends or refines some of them, suggests new ones, classifies these various explanations, and integrates them into an organized framework. One set of explanations focuses on conformity out of habit. The other refers to more conscious thought and behavior and considers coordination and increasing returns to adoption, social sanctions, informational differences, uncertainty, legitimacy, naturality, and lack of power/resources to deviate.

Public entrepreneurship is commonly understood as the outcome of the activities of a Schumpeterian political innovator. However, empirical research suggests that changes to a more efficient economic policy, even if it is known and technically easy to implement, are usually delayed. This is difficult to reconcile with Schumpeterian notions of public entrepreneurship. In this paper, it is argued that the attempt to transfer a Schumpeterian approach to the public sector is fundamentally flawed. Institutional checks and balances that characterize most modern liberal democracies make the strategy of bold leadership an unlikely choice for an incumbent. If change occurs, it occurs normally as a response to the fact that the status quo has become untenable. From a normative point of view, it is argued that if public entrepreneurship nevertheless occurs, it will often be associated with unwanted consequences. A dismantling of formal institutional checks and balances is therefore not reasonable.

This paper examines the joint impact of infrastructure capital and institutional quality on economic growth using a large panel dataset covering 99 countries and spanning the years 1980–2015. The empirical strategy involves estimating a simple growth model where, in addition to standard controls, infrastructure, institutional quality, and their interaction are included as explanatory variables. Potential endogeneity concerns are addressed by employing generalized method of moments estimators that utilize internal instruments. We find that the interaction terms between infrastructure capital and institutional quality show a positive and significant impact on economic growth. These results are robust to a variety of alternative specifications and institutional quality measures. Hence, our results suggest that maximizing returns from infrastructure capital requires improving the quality of institutions.

How can evolutionary ideas be applied to the study of social and political institutions? Charles Darwin identified the mechanisms of variation, selection and retention. He emphasized that evolutionary change depends on the uniqueness of every individual and its interactions within a population and with its environment. While introducing the contributions to this special issue, we examine some of the ontological positions underlying evolutionary theory, showing why they are appropriate for studying issues in economics, political science and sociology. We consider how these ideas might help us understand both institutional change and the formation of individual preferences.

This paper investigates the claim that colonial history has left an enduring imprint on Africa's institutional and economic development. The literature following Acemoglu, Johnson and Robinson (2001) and Sokoloff and Engerman (2000) maintains that different types of colonialism affected the institutional environment differently, and that path-dependence subsequently ensures that these institutional differences and their impact on economic performance are persistent over time. By tracing the impact of colonial institutions on contemporary institutions over time, I show that – in contrast to claims in this literature – the relevance of colonial legacies to institutional quality and to per capita income is rapidly disappearing in Africa. Differences in institutional quality or income are explained less and less by colonial legacy, while there is some evidence that precolonial social and geographical circumstances are becoming more important. I conclude that while colonialism has affected African institutional and economic development significantly, this impact is not persistent. Rather, the evidence suggests that colonialism has created a large but very temporary institutional shock, after which a long-run equilibrium is being restored.

Most standard social science accounts only offer limited explanations of institutional design, i.e. why institutions have common features observed in many different human groups. Here we suggest that these features are best explained as the outcome of evolved human cognition, in such domains as mating, moral judgment and social exchange. As empirical illustrations, we show how this evolved psychology makes marriage systems, legal norms and commons management systems intuitively obvious and compelling, thereby ensuring their occurrence and cultural stability. We extend this to propose under what conditions institutions can become ‘natural’, compelling and legitimate, and outline probable paths for institutional change given human cognitive dispositions. Explaining institutions in terms of these exogenous factors also suggests that a general theory of institutions as such is neither necessary nor in fact possible. What are required are domain-specific accounts of institutional design in different domains of evolved cognition.

We examine the cultural context for individual's trust in public institutions. To shed some light on possible cultural explanations from a more comparative perspective and cover a wider set of cultural aspects, we use indicators of cultural dimensions by Kaasa et al. (2014) based on Hofstede's (1980) approach. Multilevel regression analysis is conducted with individual-level data from two waves of the European Social Survey (2008, 2010) and regional-level data from multiple sources. Confirmatory factor analysis is used to construct the indicators of social and institutional trust and corruption. Our results suggest that individuals tend to trust institutions less in regions with large power distance. Hence, an important key for governments being more successful in achieving their aims seems to be related to improving the sense of participation and civic responsibility.

Generalized Darwinism and self-organization have been positioned as competing frameworks for explaining processes of economic and institutional change. Proponents of each view question the ontological validity and explanatory power of the other. This paper argues that information theory, rooted in modern thermodynamics, offers the potential to integrate these two perspectives in a common and rigorous framework. Both evolution and self-organization can be generalized as computational processes that can be applied to human social phenomena. Under this view, evolution is a process of algorithmic search through a combinatorial design space, while self-organization is the result of non-zero sum gains from information aggregation. Evolution depends on the existence of self-organizing forces, and evolution acts on designs for self-organizing structures. The framework yields insights on the role of agency and the emergence of novelty. The paper concludes that information theory may provide a fundamental ontological basis for economic and institutional evolution.

This special issue of the Journal of Institutional Economics on the future of institutional and evolutionary economics consists of this introduction, four full essays, and two sizeable comments. Ménard and Shirley (2014) and Ménard (2014) discuss the future of the new institutional economics, and their two essays are followed by a reflection by Hodgson. Winter (2014) and Witt (2014) discuss the future of evolutionary economics, and their essays are followed by a comment by Stoelhorst. Here, we introduce these essays and comments by putting them in a broader historical perspective. In particular, we trace the common origins of modern institutional and evolutionary economics, particularly in the work of Veblen, as well as important additional influences such as Schumpeter and Simon. We highlight how the two approaches became disconnected, and signal the possibility of, and need for, re-establishing closer connections between them. Possible elements of a future overlapping research programme are outlined.

There exists a long line of challengers to the ‘Coase Theorem’. All of these rest on fundamental misconceptions of property rights, transaction costs, and their interaction. Here I examine two attacks that have gone unchallenged: one by Halpin, the other by Usher. I argue that both, in failing to either use or understand an adequate definition of transaction costs, fail to deliver a fatal blow to Coase's famous idea.

These reflections are prompted by the papers by Ménard (2014) and Ménard and Shirley (2014). Their essays centre on the path-breaking contributions to the ‘new institutional economics’ (NIE) by Ronald Coase, Douglass North and Oliver Williamson. In response, while recognising their substantial achievements, it is pointed out that these three thinkers had contrasting views on key points. Furthermore, Ménard's and Shirley's three ‘golden triangle’ NIE concepts – transaction costs, property rights and contracts – are themselves disputed. Once all this is acknowledged, differences of view appear within the NIE, raising interesting questions concerning its identity and boundaries, including its differences with the original institutionalism. There are sizeable overlaps between the two traditions. It is argued here that the NIE can learn from the original institutionalism, particularly when elaborating more dynamic analyses, and developing more nuanced, psychologically-grounded and empirically viable theories of human motivation.

In recent years, a novel, specifically institutional approach to public regulation has become popular, particularly in the Anglo-Saxon world: ‘Libertarian Paternalism’ promises to tackle society's problems in a way that increases welfare without compromising people's freedom and autonomy. The key instrument advanced by this programme is nudges. Although nudges’ ethical quality has been discussed at length, the political economy driving their implementation by self-interested (and possibly boundedly rational) policy makers and bureaucrats has been largely neglected so far. This paper elaborates on how this gap might be filled.