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.

This article aims to address the lack of transaction costs economics (TCE) studies in health economics. It provides a content analysis of ObamaCare and 25 lawsuits that challenge the 2010 reform. It shows that the cultural environment determines the strength of features of governance structures and in line with this the strength of their instruments. Following Williamson's TCE model of governance structures, the zero transaction costs criterion is supplanted by the remediableness criterion. Assuming that ObamaCare might be ruled to be constitutional, the regulation of healthcare is found to be a comparative efficient governance structure in addressing adverse selection. However, the TCE analysis also reveals that ObamaCare itself is subject to some flaws in efficiency and effectiveness, namely: unbalanced adaptation mechanisms, unbalanced incentives and weak enforcement devices.

Law and economics scholars argue that the common law evolves toward efficiency. Invisible-hand theories suggest that the law is primarily driven by a selection process whereby inefficient laws are litigated more frequently than efficient laws, and hence are more likely to be overturned. However, the preferences of judges also necessarily affect legal change. This paper models the interaction of these two forces to evaluate the efficiency claim, and then applies the conclusions to the evolution of accident law in the United States beginning in the 19th century. Specifically, it attributes the persistence of negligence to its efficiency properties, despite its having been initially selected by judges for a different reason. The paper relates legal evolution to biological evolution by employing the concepts of natural and artificial selection, and the more recent concept of exaptation.

The article briefly introduces Hans Albert and the basic elements of his critique of neoclassical economics as a form of ‘model Platonism’. The two most important elements of his general methodological critique of economics – namely the institutional vacuum inherent in much economic modelling and its unrealistic assumptions about behaviour – are introduced. It is argued that these specific critiques have been taken up with varying degrees of success in areas of economic research such as institutional economics and in behavioural and experimental research programmes. However, the fundamental methodological gist of his critique remains as pertinent to mainstream economics as it was when originally formulated. The influence of ‘model Platonic’ thinking remains pervasive in academia and also in public policy.

This article is a translation of the original German text of Hans Albert's 1963 article titled ‘Modell-Platonismus. Der neoklassische Stil des ökonomischen Denkens in kritischer Beleuchtung’, in F. Karrenberg and H. Albert (eds.), Sozialwissenschaft und Gesellschaftsgestaltung – Festschrift für Gerhard Weisser, Berlin: Duncker und Humblot, 45–76. The enduring relevance of Hans Albert's critique together with an introduction to the author as one of Germanys most distinguished philosophers of science can be found in Arnold and Maier-Rigaud (2012) also in this volume.

This paper analyzes the relation of culture, institutions and economic development using the example of Indonesia. The success of economic catch-up development depends essentially on the interconnection between pre-existing informal constraints on the one hand and novel, imported institutions on the other. Hence culture, understood as the interplay between legal rules and non-legal constraints, has to be considered as an important determinant of economic development and growth. In order to adapt economic policies and thereby prevent institutional traps, which may otherwise hinder economic reforms, it is essential to understand culture and the ways in which different cultural factors support or constrain the functioning of formal institutional settings. Applying a cultural approach to economics in the case of Indonesia's economic development allows for the inclusion of complex cultural conditionality of economic behavior and puts special emphasis on the role of politicians as public and cultural entrepreneurs. Altogether, the example of Indonesia demonstrates once more the necessity to apply a cultural approach to the study of catch-up development in a globalized world.

The paper discusses John R. Commons's original theory of institutions, where the latter are defined as going concerns and their working rules, or collective action restraining and expanding individual action. Such organizational approach of institutions makes important contributions to institutional economics in general, through its notion of a hierarchy of collective action, its threefold typology of transactions, and its holindividualist stance. Commons's genuine advances are counterbalanced by theoretical limits, which illustrate the unfinished character of his attempt to make a contribution to a ‘rounded-out theory of Political economy’, e.g. the ambiguous place of markets in his theory, the state understood as a model for other going concerns and, distinctly, the restricted definition of institutions as organizations. In some important respects, his theory complements or goes further than other currents of institutional economics; its weak points are sometimes the reverse side of his very contributions.

Corporate social responsibility (CSR) was long associated with the ethics of company heads but now falls within an institutional process whereby practices give rise to rules which in turn modify company actions. CSR has spread as a result of social demand for a more ecological society, but it also constitutes a response to the crisis of shareholder governance. Drawing on the notion of ‘conception of control’ set out by Neil Fligstein (1990), we argue that CSR has given rise to a new ‘conception of control’, which we term ‘shareholder–CSR compatible’. Such a conception reflects how governance changes when environmental and societal responsibilities are combined with responsibility to shareholders. Shareholder value is still central within the enterprise, but top managers must now assume the position of mediators between these two imperatives.

If those with political power benefit from corrupt institutions, rulers might not adopt the rule of law so the ruling class can command a larger share of a smaller pie. An empirical analysis reveals that the size of government is larger in those countries that enforce the rule of law. If government expenditures provide some measure of the ability of the ruling class to command resources, this suggests that those with political power could benefit from imposing a fairer and more objective legal structure. Another conjecture is that those in power maintain corrupt governments to pay off their supporters and enhance their ability to remain in power. However, the rule of law is also positively associated with political stability, so better enforcement of the rule of law also enhances the ability of incumbent governments to remain in power.

The problem of institutional transplantation is an important issue. In Jeremy Bentham's work, we find practical as well as theoretical proposals regarding this problem. Here, we view his work as an invitation to reflect on the overall nature of the question of institutional design and transplantation. The transfer of institutions requires knowledge of ‘place and time’ that will allow for an accommodation of the transferred institutions to their new soil. However, an awareness of this type of knowledge and thus relying on its actually being available is not viable from a practical point of view. This is due to the fact that the core of informal institutions is tacit, which imposes a fundamental constraint on the process of institutional transplantation; informal norms must co-exist with formal rules, and such merging requires some accommodation of both types of rules.

We study the effects of institutional instability on growth. Using principal components analysis, we construct measures of institutional quality and instability from the political risk index of the International Country Risk Guide. A panel-data analysis of 132 countries during 1984–2004 reveals that institutional quality, especially with regard to the legal system and the protection of property rights, is positively linked to growth. As for institutional instability, we find evidence of a positive relationship in rich countries but a negative link in poor countries, suggesting that instability may reduce problems of institutional sclerosis in the former and that instability primarily entails an increase in transactions costs and uncertainty in the latter.

A growing body of evidence documents a vast array of economic and social ill-effects of public perceived corruption. These findings and the scant evidence of recent success in the fight against corruption beg the question: how to abate it? We document the existence of a negative, statistically significant and quantitatively large impact of economic freedom (our proxy for institutions of capitalism, markets and competition) on public corruption. This negative response of corruption to economic freedom holds after allowing for non-linearities interacting economic freedom and political rights, endowments, legal families, ethnicity and for robust determinants of corruption uncovered by Daniel Treisman [‘What Have We Learned About the Causes of Corruption From Ten Years of Cross-National Empirical Research?’, Annual Review of Political Science, 10: 211–244], such as income, democracy, freedom of the press and fuel exports. Thus, this paper helps to explain why high-income prosperous countries exhibit low levels of public perceived corruption, and why honesty is a normal good.

John Searle has developed a strong theory of how speech acts and agreements generate institutions. How is the general theory specified for political institutions? He, like Max Weber, suggests that a government monopoly of soldiers is a condition for the existence of political institutions. However, governments' wielding of force is only political if those attacked consider the attack a responsible and a morally acceptable act. All political power in Searle's theory is deontic. It is assigned as a right, an obligation or the like, as a status function. If power wielding by a government is not assigned, it is beyond the political; it is only brute force. My contention is that this distinction limits the power of Searle's theory in the analysis of politics. From the idea of political institutions as ultimate institutions in a specific, bordered territory it is the strong idea of deonticity that is misleading. Ultimate institutions cannot by definition have externally assigned status. Leaders of other ultimate institutions can accept their existence, but then mainly because they have the military power to defend their borders. Nation states, demanding territorial sovereignty, therefore logically demand a monopoly of soldiers. This sovereignty seen over time suggests an evolutionary first principle of political institutions.

Economists have been investigating the link between institutions and economic performance for several years. While econometric studies of this link have flourished, they are of limited use in understanding the causal mechanisms making some institutions responsible for economic performance. Several works using game theory and akin to the ‘new institutional economics’ have entertained the goal of developing micro-explanations of the institutions–performance link. Because game theory focuses on individuals’ actions and beliefs, game-theoretic studies of institutions are thought to oppose more ‘structuralist’ explanations that downplay the role of individual agents and put more emphasis on the importance of social (or ‘macro’) structures. This paper demonstrates that this claim is misconceived, as the micro-explanations produced by game-theoretic models must assume already existing macro-structures. Institutions produce downward effects, shaping each agent's action. Moreover, in a game-theoretic framework, macro-structures are constitutive of individual agency since, without them, agents would often be unable to choose. I illustrate this claim with the example of Avner Greif's study of the role of cultural beliefs in the economic organisation of medieval societies.

This paper focuses on understanding rule systems by documenting existing rules and their development in irrigation management in Nepal. We analyze the rule formation of a sample of irrigation systems based on the ADICO syntax (Crawford & Ostrom, 1995; Ostrom, 2005). Farmer-managed irrigation systems generally are autonomous in devising their own rules based on local context considering the ideas, norms and beliefs shared within the community. Rule formation in agency-managed irrigation systems, however, is mostly done by external officials. Strong rule enforcement mechanisms were found in farmer-managed systems compared with agency-managed systems. Better rule enforcement created favorable conditions for collective action among the users and ensured better performance of the irrigation systems. Results imply that the formation of new rules should fully consider biophysical attributes as well as community beliefs and ideas.

The administration of the forensic science process falls into the hands of supervisors, local administrators, and prosecution attorneys and police agencies. In the current structure, the police and prosecution are the principal and the forensic scientists the agent. I identify changes that must be made in that relationship to eliminate biases and to determine the major obstacles that stand in the way of creating the necessary changes. I focus on the ‘middle managers’ – the supervisors and laboratory directors – as the cultural key masters. I recommend: mechanism design principles to enable laboratories to report to a board of directors, rather than the prosecutor and police; for the development of compensation plans for middle managers to build a culture of learning based on error tolerance rather than error punishment; and for the use of intrinsic and extrinsic motivations to facilitate the identity changes of cultural key masters.

Health systems provide a rich field for testing hypotheses of institutional economics. The incentive structure of current healthcare delivery systems have deep historical and cultural roots, yet must cope with rapid technological change as well as market and government failures. This paper applies the economic approach of comparative and historical institutional analysis (Aoki, 2001; Greif, 2006) to health care systems by conceptualizing physician control over dispensing revenues as a social institution. The theory developed – emphasizing the interplay between cultural beliefs, interest groups, technological change, insurance expansion and government financing – offers a plausible explanation of reforms since the 1960s separating prescribing from dispensing in societies such as Japan, South Korea, Taiwan and China. Technological change and adoption of universal coverage trigger reforms by greatly increasing the social opportunity costs of physician over-prescribing and reshaping the political economy of forces impinging on the doctor–patient relationship.

In this paper I consider the implications of work in evolutionary psychology for institutional analysis. I respond to Pascal Boyer and Michael Bang Petersen (‘The Naturalness of (Many) Social Institutions: Evolved Cognition as their Foundation’; 2012), who put forward a programmatic statement in this connection. I argue that their discussion overstates the explanatory power of evolutionary psychology and does not take sufficient account of what we already know about institutions. At the same time, I suggest that they, and the empirical work upon which they draw, make an important contribution by helping us to establish more clearly the boundary conditions of institutional analysis. I call for ongoing cooperation and for the establishment of a unified research tradition that brings together both evolutionary psychology and institutionalism.

This paper investigates the relationship between judicial resources and individuals’ trust in the justice system. We argue that the justice budget is likely to have a positive and significant impact on individuals’ trust in justice, thanks to its role as a signal when individuals face uncertainty regarding the judicial environment. We test this hypothesis empirically using three different budget-related variables: the justice budget per incoming case, the number of magistrates and the intensity of legal aid. Across our three regressions, we find a positive and significant correlation between judicial resources and individuals’ declared trust in the justice system. This positive relationship is robust to the introduction of socio-demographic, cultural, institutional and economic control variables. We finally offer empirical support to the intuition that the effect of the justice budget on trust in justice is likely to be greater when individuals are more satisfied with the level of democracy in their country.