Institutions and co-ordination costs

Abstract

Economic literature sees the existence of institutions as being justified by market failure. This paper attempts to develop a different hypothesis by linking institutions to the solution of co-ordination dilemmas. According to this line of thought, institutional action is not circumscribed to the supplying of ‘regulative resources’ able to lower uncertainty and limiting the risks of free riding. It includes rather the provision of a vast set of public goods characterised by high complementarity and marked constraints on the continuity of supply. In the production of such goods, the presence of multiplicity of equilibria and high costs of information born by individual agents in formulating a cooperative agreement often makes a decentralised decision-making process impracticable. On the other hand, as we try to show, a central authority (an institutional subject), assuming long term obligations and lowering co-ordination costs, can mitigate collective action problems in a wide range of circumstances