Competition Among Institutions

Abstract

Economic theory offers two different approaches to the analysis of group formation and the role of institutions. The general equilibrium approach explores the influence of the economic environment on the formation of groups. The game theoretic approach runs in the opposite direction; it explores the influence of institutions on economic outcomes. To integrate these approaches we consider situations in which institutions must compete for members. Our focus is on the fundamental interaction between memberships and policies. The policy that an institution adopts depends on its membership, while its membership depends on the policies of all the institutions. We provide the basic elements for a theory of competition among institutions: an abstract definition of an institution and the corresponding equilibrium concepts. We demonstrate by example, the possibility that equilibrium may not exist. In the absence of a general existence result, we pursue three different avenues. We begin with existence results based on maximization of a utilitarian social welfare function. This places strong restrictions on the decision-making process, although it covers a number of interesting political applications. This is followed by a continuity-based approach. Although quite general, it relies critically on an assumption that the institutions have certain idiosyncratic features. To handle cases without idiosyncrasies, we turn to an algebraic approach. Although existence is established, the result depends on the dimensionality of the problem. Together, these avenues provide a broad class of models for which equilibrium exists, covering cases with multiple dimensions, multiple institutions, and general institutional decision-making processes