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Institutional Resilience and Economic Systems
Dragos Paul AligicaVlad Tarko
George Mason University, Mercatus Center
Association of Private Enterprise Education 2013
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Outline
• What is resilience?• The role of institutions• Highly Optimized Tolerance• Resilience by adaptability• Polycentricity as the framework for
adaptability
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Resilience
• Institutional resilience is the ability of a social system (society, community, organization) to – react and adapt to abrupt challenges
(internal or external) and/or – avoid gradually drifting along
destructive slippery slopes.
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The role of institutions
• Innovation is endogenous• Non-renewable & non-abundant
resources– The Red Queen metaphor
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Highly Optimized Tolerance
• Experience & Data -> estimations of risk
• Efficient prevention:– Allocate resources for prevention based
on expected damage– The system of rules gets more complex– Vulnerabilities to uncertainty,
unexpected sources of damage
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Resilience by adaptability
• Ability to react to new challenges, rather than predict them
• Why systems fail? Monitoring and enforcement problems:– Incentive problems– Knowledge problems:
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Institutional complexity
• Ostrom (2008):– “Given the logic of combinatorics, it is
impossible for public officials or for direct beneficiaries to conduct a complete analysis of the expected personal benefits or broader performance of all of the potential rule changes that could be made by the individuals served by a self-organized resource governance system trying to improve its performance. A similar impossibility also exists for biological systems – they evolve.”
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Causes of institutional failure
• Constanza, Low, Ostrom and Wilson (2001) :–Missing Institutions– Scale Mismatches • Missing Connections: decision making
linkages between scales are ineffective. • Incorrect Scale of Information: decisions
are based on information aggregated at the wrong scale, even though information may exist at the appropriate scale.
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Polycentricity
• Multiple independent decision centers– Competing at the same scale– Different functions at different scales
• Over-arching system of rules:– Domains of universality– Domains of acceptable variance and
diversity
• Good system of rules:– Spontaneous order