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Institutional resilience: how the formal legal system sustains informal cooperation

Published online by Cambridge University Press:  08 November 2022

Clemens Buchen Open the ORCID record for Clemens Buchen [Opens in a new window]
Clemens Buchen*
Affiliation:
Economics Group, WHU – Otto Beisheim School of Management, Vallendar, Germany
*
Corresponding author. Email: clemens.buchen@whu.edu
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Abstract

This paper introduces the concept of institutional resilience based on a population game. Agents in an economy are randomly matched to play a coordination game with two strategies, cooperate and defect. A breach of contract can be adjudicated in court. Agents can update their strategy, which is modelled using the replicator dynamic. In this context, cooperation is defined as the informal institution, whereas the legal system (contract law) constitutes the formal institution. Institutional resilience is defined by how the formal institution of a functioning legal system complements the informal institution of cooperation in a dynamic way. In the wake of an adverse exogenous shock, the formal institution can prevent a total breakdown of cooperation in the population.

Keywords

Cooperationcoordination gameformal institutioninformal institutionpopulation gamereplicator dynamicstransitionC73O12P14P16
Type
Research Article
Information
Journal of Institutional Economics , Volume 20 , 2024 , e1
Copyright
Copyright © The Author(s), 2022. Published by Cambridge University Press on behalf of Millennium Economics Ltd.

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