Challenges and Obstacles in Federalism and Democracy

This article briefly describes some of the challenges to the traditional fields of economy and political area: the public choice approach, the tragedy of the commons debate, the ‘new’ institutional economy, and behavioral challenges. Then, the components of a basic analytical framework are presented that provide a general means for analyzing public economies and diverse forms of collective action. Descriptive study related to public economies, common-pool resources, and behavioral change have summarized what has contributed to the field of institutions. The last section concludes that the macro foundations of institutions appear firmer than the micro foundations related to the model of the individual to be used and discusses this problem.
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Fabio refers to the ‘imperialism’ of sociological theories of market behavior and argues for recognizing the essential importance of culture and social structure in explaining economic behavior and outcomes (Fabio Rojas's, 2006). Political scientists have also worried about imperialism – both in their studies in international relations and with regard to a fear of takeover by economists and rational choice theory.
Looking at the positive side of interdisciplinary relationships, Herbert Simon (1999) called the exchange between economics and political science a ‘potlatch’ where each discipline has brought ‘gifts’ to the other. After many years of suspicions regarding the ‘gifts’ brought by the other discipline, Simon concludes that the extensive methodological and empirical development of the last fifty years has prepared all of the social sciences for a better interaction in the future. ‘Gift-giving between economics and the other social sciences can become a genuine exchange, going in both directions’.
It is best described what we have achieved in the relationship between economics and political science over decades or are more of challenges. At first, the new interdisciplinary approaches explored by venturesome and imaginative scholars shocked the mainstream of both disciplines given the new questions, methods, and research strategies. Challenges frequently provoke growth, and the eventual development of an interdisciplinary field of ‘institutions’ has indeed developed out of these challenges. While institutional analysis builds on the gifts provided by economists and political scientists, it also draws inspiration and methods from the other social sciences as well as biology to provide a general framework for the analysis of humanly designed institutions at multiple levels and their consequences. In this review article, I will briefly describe four interdisciplinary approaches that were perceived by many traditional scholars as major challenges during some decades to the traditional disciplinary fields.
The four challenges are: the public choice approach, the tragedy of the commons debate, the ‘new’ institutional economics, and behavioral game theory. Second, I will discuss the components of a basic institutional analysis framework that provides a general method for starting the analysis of diverse types of collective action. Third, I will review empirical research related to public economies, common-pool resources, and testing theories of individual behavior that have contributed to the field of institutional analysis.
I will conclude with a brief synthesis of the central lessons that have emerged as a result of the ‘institutional analysis’ between economics and political science.
Let us briefly examine the challenges resulting from the emergence of the public choice approach, the tragedy of the commons debate, the ‘new’ institutional economics, and behavioral theory.
The public choice approach
Important developments in science frequently occur at the boundaries of disci-plines when scholars from two or more fields address old questions in new ways. Important scholarly works at the borders of economics and political science were included in the publication of Kenneth Arrow’s Social Choice and Individual Values (1951), Anthony Down’s An Economic Theory of Democracy (1957), Duncan Black’s The Theory of Committees and Elections (1958), James Buchanan and Gordon Tullock’s The Calculus of Consent (1962), and Mancur Olson’s The Logic of Collective Action (1965). This generated a new challenge and growth approach – called public choice – to be developed by a group of economists, political scientists, and sociologists who have used methods originally developed in economics to examine the constitution of order in the public sector.
An organizing question underlying work in the public choice tradition has been: What incentives do actors face when making decisions in the public sector? Having identified these incentives, public choice theorists predict how different individuals will act and how individual behavior will aggregate into collective outcomes. Incentives result from the structure of a situation that is affected by the type of goods involved, combined with attributes of a community and the rules used for making decisions about allocation, production, distribution, and consumption of those goods.
The early work of public choice theorists challenged the notion that order in the public sector stemmed only from the central direction. ‘Polycentric’ connotes many centers of decision-making which are formally independent of each other. To the extent that they take each other into account in competitive relationships, enter into various contractual and cooperative undertakings or have recourse to central mechanisms to resolve conflicts, the various political jurisdictions in a certain area may function in a coherent manner with consistent and predictable patterns of interacting behavior. To the extent that this is so, they may be said to function as a system.
This brought a different perspective to the study of governance. Instead of presuming the existence of only two kinds of order - the market and the government-political economists have come to recognize that order can be achieved in public economies where large, medium, and small governmental and non-governmental enterprises engage in both competitive and cooperative relationships.
The public choice or ‘rational choice’ approach was quickly adopted by many political scientists who rapidly developed and applied it to the study of many different types of institutional arrangements. The approach was strongly criticized by other political scientists, however, because it was thought to portray all human behavior as narrowly self interested and shortsighted (Green and Shapiro, 1994).
The Common Heartbreak
Another important interdisciplinary development is the analysis by both ecol-ogists and economists of ‘the tragedy of the commons’ (Hardin, 1968; Gordon, 1954). This theory, like that of Mancur Olson, challenged the earlier ‘group theorists’ (e.g. Truman, 1951; Bentley, 1935) who presumed that individuals were motivated to contribute to efforts to solve common problems when it was in their long-term interest to do so. Gordon and Hardin saw individuals as focused on maximizing their immediate short-term benefits. This meant that they were helpless to do anything else but overharvest when they jointly used a resource system that was not privately owned or the property of a governmental unit. The prediction that individuals would destroy the very resources on which they depended was consistent with that of non–cooperative game theory models of one-shot or finitely repeated dilemma settings where everyone pursuing their own short-term benefits ended up achieving far less individually and together than was feasible if they had found a way of cooperating with one another.
This work opened up a new body of theoretical and empirical work to challenge the presumption that individuals were forever trapped in a remorseless tragedy. Many common-property institutions around the world were documented where individuals had overcome the tragedy. No ‘sure cures’ for the problem were found, however, as failure occurred as regards private property, government property, and common property. Overharvesting was assured whenever a resource was effectively an open-access resource.
Institutional Build Up
The field of institutional economics has been a major challenge to both econo-mists and political scientists. Ronald Coase started the first expedition in 1937 with his article on ‘The Nature of the Firm’.
Why should one find firms existing in the midst of highly competitive markets for strictly private goods? He challenged the presumed dichotomy of the world into markets for production, allocation, and distribution of private goods and hierarchies for the production, allocation, and distribution of collective goods. Coase answered his own question by pointing to the costs that are associated with all forms of organization that had not been included in economic models of the market. These transaction costs could be substantial and would lead challenges and growth entrepreneurs to try out alternative forms of organization even when they were dealing with private goods.

Components of Institutions Related Public Economies
To study public economies, one has to examine multiple levels of organization ranging from small neighborhoods to international regimes, rather than focusing on only one level of a single, isolated government. System-level outcomes are generated through a series of linked action situations that exist in both public and private realms of activity and generate both upward and downward causal processes. The old-fashioned dichotomy between ‘the market’ and ‘the state’ challenges and growth has been replaced. Institutional analysts recognize that markets cannot exist without well-defined property rights, police to enforce these rights, and courts that enforce contracts. Nor can a centralized government do all of the above by itself.
An action ground at the basis of analysis
The core analytical unit of institutional analysis is an ‘action arena’ in which participants (e.g. individuals, families, firms, voluntary associations, governmental units) interact in a structure of incentives generated by the characteristics of the goods involved, the rules-in-use, and the attributes of the community of participants involved (Ostrom, 2005).
Participants possess varying levels of information, potentially diverse preferences and norms of behavior, and diverse time horizons. The arena may be represented as a formal game, an agent-based model, a detailed case study, or an analytical narrative.
An action arena is affected by three clusters of variables that are treated as exogenous for any specific analysis of the incentives and likely behavior within an arena, but become endogenous variables when analyzing institutional change. These variables are the characteristics of goods, the rules-in-use, and the attributes of the community of participants. Performance as regards efficiency, equity, adaptation, and robustness is not only an attribute of the human system of relationships that is generated but how that system is related to specific biophysical and social domains.
Characteristics of goods
Two basic attributes are now widely used to distinguish among goods and services in regard to their provision and production: difficulty of exclusion and subtractability (V. Ostrom and E. Ostrom, 1977).
When the benefits of a good is available to all members of a group – whether or not they contribute to providing the good – that good is characterized by the problem of excludability. The group may be small, such as all those who live in a particular neighborhood, or may be national or international in scale.
When excluding beneficiaries from a group is costly, those wishing to provide a good or service face potential free-rider problems (Olson, 1965). Individuals who gain from the safety of a community or the protection of the atmosphere, for example, may not contribute resources to provision activities, hoping that others will bear the burden. This is not to say that all individuals will free-ride whenever they can. A strong incentive exists, however, to free-ride in all situations where applications of institutional analysis are made to the history of social-ecological systems in diverse ecological domains. Potential beneficiaries cannot easily be excluded for their failure to contribute to the provision of a good or service.
The difference between the provision and production of goods
A crucial problem in obtaining public goods and common-pool resources relates to the provision of the goods rather than to the production of the goods. If large groups of individuals wish to consume collective goods, it is difficult to rely on voluntary arrangements over long periods of time to (1) obtain revenue in a fair and equitable manner, (2) articulate demands, (3) allocate the goods and services to some individuals and exclude others, (4) regulate the patterns of use among the community of users, and (5) monitor the performance of producers. These five activities relate to the provision side of a public economy and not to the production side. The production side involves the transformation of input units (land, labor, and capital) into particular goods and services.
In a private market, provision activities take place as individual buyers engage in quid pro quo relationships with sellers of goods and services. When exclusion is low-cost to the supplier, preferences for the amount and quantity of a good are revealed as a result of many quid pro quo transactions. Producers learn about preferences through the consumers’ willingness to pay for various goods offered for sale. Where exclusion is difficult, designing mechanisms that honestly reflect beneficiaries’ preferences and their willingness to pay is difficult and complex. In very small groups, those affected are usually able to discuss their preferences and constraints on a face-to-face basis and to reach a rough consensus. In larger groups, provision decisions are apt to be made through mechanisms such as voting or the delegation of authority to public challenges and growth officials. The extensive literature on voting systems demonstrates how difficult it is to translate individual preferences into collective choices that adequately reflect individual views (Arrow, 1951; Shepsle, 1979; Buchanan and Tullock, 1962).
When citizens establish an organization with the authority to use sanctions against those who do not contribute resources toward the provision of a collective good, they constitute a provision or collective consumption unit. Many provision units have the formal status of a government established at a local, regional, or national scale.
Once a collective consumption unit is established, how production is organized is an entirely separate question. A collective consumption unit is faced with at least six different institutional arrangements for arranging for the supply of local public goods. These include: (1) establishing and operating its ‘own’ production unit, (2) contracting with a private firm, (3) contracting with another governmental unit, (4) obtaining some services from its own production unit and other services from other governmental or private producers, (5) establishing standards of service that must be met by authorized producers and allowing each consumer to select a private vendor and to procure services from an authorized supplier, and (6) issuing vouchers to families and permitting them to purchase service from any authorized supplier.
All of these arrangements are used by collective consumption units at a local, regional, national, or international level to arrange for the production of particular collective goods (Gibson et al., 2005). Given both the diversity of collective consumption units and the diversity of mechanisms each can use to arrange for production, institutions for the governance of public economies and other regions could be expected to derive significant advantage through complex patterns of organization.
Provision systems often do not resemble the textbook versions of either a government or a strictly private-for-profit firm, especially when participants have constituted their own self-governing units. Thus, scholars drawing on traditional conceptions of ‘the market’ and ‘the state’ have not recognized them as potentially viable forms of organization and have either called for their consolidation into a centralized government or ignored their existence. It is a bit ironic that many vibrant self-governed institutions have been misclassified or ignored in an era that many observers consider one of ever-greater democratization.
Attributes of goods affecting the organizational needs and pro-duction units
To explain why citizens and their officials have organized such diverse sets of enterprises in local, regional, and international systems, one needs to examine attributes of collective goods, in addition to those of exclusion and joint-ness, which affect the costs and benefits of provision and production activities. Goods that are capital-intensive, for example, can achieve economies of scale in larger production units, while labor-intensive services can be produced at lower average costs in smaller production units. In addition to economies of scale in production, other attributes of goods may affect how provision and production activities are accomplished.
Whether a good needs to be coproduced or not is an important factor leading to different outcomes depending on the way public economies are organized (Parks et al., 1999; Ostrom, 1996).
Education and other public services cannot be fully produced by a production unit entirely by itself. The teacher in the classroom is an essential aspect of the production of education but so is the effort made by students and their parents, siblings, and friends. Coproduction of services is more difficult to maintain when provision units are extremely large and heterogeneous and production units are isolated from the input of those for whom the service is intended.
Commonly accepted and legal provisions
A key finding of field research is the multiplicity of specific rules-in use found in operational settings related to the provision and production of collective goods. An important type of rules is boundary rules, which determine who and what is in and out of a provision organization. The important attribute of boundary rules is the degree of match between the provision organization and the local situation rather than the specific rule used (E. Ostrom, 2005, 2007).
Some provision units face considerable biophysical constraints when the good is a natural common-pool resource such as a groundwater basin or a river. Such resources have their own geographic boundary. Creating a match between the boundary of those who benefit and are required to contribute and the boundary of the resource may be impossible in a highly centralized regime. Heterogeneity is a challenge at all levels of organization ( Keohane and Ostrom, 1995).
Further, common-pool resources may themselves be nested in an ever-larger sequence of resource units. A micro watershed is nested in a system of ever larger watersheds that eventuates into a major river system. On the other hand, the biophysical world does not have a strong impact on the efficacy of using diverse boundaries for the provision of public education or police response services. One is constrained more by the transaction costs of reaching decisions and monitoring performance.
Once basic boundary rules define who is a legitimate beneficiary and who must contribute to the provision of a collective good, provision units frequently create rules related to the information that must be made public or kept secret, to the actions that must or may be taken or are forbidden, and the outcomes (and resulting benefits and costs) to be achieved and distributed. To be effective, rules must be generally known and understood, considered relatively legitimate, and thus in general to be followed and enforced. Written legislation or contract provisions that are not common knowledge do not affect the structure of a particular action situation unless someone involved in the situation invokes the rule and finds someone to enforce it.
Thus, a problem with doing research on the effect of diverse institutional ar-rangements is sorting out the rules that exist on paper but are not used by participants as contrasted with rules that are common knowledge of the participants and enforced locally but not part of the formal legal structure. When scholars refer to a system as having a ‘rule of law’, they mean that most of the rules used in practice are consistent with the rules-in-form detailed in legislation, court decisions, and administrative procedures.
The crucial point is that rules affect the structure of the situation under analysis. One should expect to see differences in the incentives and likely behavior when one configuration of rules is used versus another.
Attributes of a community
Many attributes of a community are also likely to affect provision activities, including the size of the group affected, the homogeneity or heterogeneity of interests, the patterns of migration into or out of a community, and the discount rate used by individuals in ongoing situations. The specific attributes of a community that might affect outcomes could be very large. An institutional analyst, however, needs to know answers to the following set of questions to begin an analysis of an action arena:
• Is there general agreement on the rules related to who is included as a member with both benefits and responsibilities?
• Do participants have a shared understanding of what their mutual re-sponsibilities are as well as the formulae used for distribution of benefits?
• Are these rules considered legitimate and fair?
• How are the rules transmitted from one generation to the next or to those who migrate into the group?
A diversity of community attributes affects the answers to these questions.
Polycentric-linked systems
Once one recognizes that the organization of the provision of collective goods is the crucial step in obtaining or sustaining collective goods, one can begin to build a different theoretical explanation of political orders. One form of political order is created when a central power uses a monopoly of force to impose its central will on its subjects.
The work of Margaret Levi (1988) convincingly demonstrates how costly and unstable it is to rely strictly on a central monopoly of force to govern effectively. Other forms of order at all levels of organization exist and need serious study.
Robert Putnam (1993) has demonstrated the importance of networks in the creation of social capital that enables complex governance systems to evolve without all links being planned from the top ( Ostrom and Ahn, 2003).
Robert Keohane (1984; 2001) views political order at the international level without depending on the hegemony of one state dominating the entire system.
We need to include in the analysis of institutional arrangements that are not encountered in basic economics and political science textbooks that tend to focus exclusively on markets or the state. In addition to general-purpose governments, a host of other organizations may undertake the provision of collective goods. Sometimes these will be bowling leagues.
Descriptive cum Analytical Study Related to Institutional Analysis
Considerable research has provided strong support for a multi-disciplinary study of institutional analysis.
Public economies in certain sectors
With regard to the organization of governments serving a certain area, scholars in the public choice and new institutional economics tradition have analyzed why complex systems perform better than simple and highly centralized challenges and growth systems. The optimal scale of organization for the production and provision of goods and services differs radically for different types of collective goods and services. This leads to the prediction that public economies in certain areas with many governmental enterprises organized at diverse scales will perform more effectively than either one large-scale government or a large number of governments organized only at a small scale.
Considerable research on local public economies, and multi-level systems more generally has demonstrated that effective social order can emerge from polycentric systems and need not be imposed by a centralized system. Individuals are not able to engage in a wide diversity of independent quid pro quo relationships with any vendor they choose, but rather receive collective goods from the producer chosen by a provision unit. Unlike markets, however, thick relationships exist among entities in a local public economy. One must examine structure and performance at an inter-organizational level of analysis as well as the level of a single firm governmental units.
The public economy of security services
In a wide diversity of studies – ranging from carefully matched neighborhoods in one certain area to a random sample of a number of certain areas – we consistently found:
i. Small- to-medium-sized police departments outperform large police departments serving similar communities – and at similar or lower costs.
ii. In polycentric systems, services that are characterized by substantial economies of scale (e.g. crime lab, dispatching) are produced by large units, and services characterized by diseconomies of scale were produced by smaller units outside of the center city. In other words, polycentric systems enable police departments to search out more efficient modes of production than described in the textbooks.
iii. Citizens living in the most fragmented certain areas receive more police presence on the streets for their tax expenditures than do citizens living in the most consolidated areas. The most efficient producers supply more output for given inputs in high multiplicity of certain areas than do the most efficient producers in lower certain areas. Thus, the presence of many other producers for comparison enhances the efficiency of direct-service producers.
Other public services
In addition to the research on stakeholders, scholars have conducted rigorous empirical research on a variety of questions related to the polycentric organiza-tion of public economies. Early empirical studies challenged the presumption that fragmentation of governments leads to higher costs.
Summary of the analysis and conclusions
First, the horizontal fragmentation of multi-purpose governments leads to lower spending.
Second, local government units compete in a market which is geographically limited: competition between units is present at a relatively small spatial scale but not across wide areas.
Third, the vertical concentration of market share in the large ‘top tier’ units is associated with higher spending.
Finally, the establishment of barriers to entry is positively related to expenditures by the local government units that are protected by the barriers. In sum, the broad pattern of the evidence suggests that lower spending is a feature of fragmented and de-concentrated local government systems. By contrast, consolidated and concentrated structures tend to be associated with higher spending.
As a result of extensive empirical and theoretical research, the presumed self- evident truth that constructing one government for each certain area is the best way to achieve efficiency and equity, has slowly been replaced with a recognition that judging ‘structure directly on the single criterion of uniformity contributes little to the advancement of research or reform’.
Instead of a single best design that would have to cope with the wide variety of problems faced in different localities, a polycentric theory generates core principles that can be used in the design of effective local institutions when used by informed and interested citizens and public officials.
Studying common-pool resources
Since many theoretical studies of common-pool resources have continued to analyze simple systems using relatively similar assumptions. Users are assumed to be short-term, profit maximizing actors who have complete information and are homogeneous in terms of their assets, skills, discount rates, and cultural views. In this theory, anyone can enter the resource and take resource units and overharvesting results.
Descriptive anomalies from the field
Contrary to this well-accepted theory, however, a large number of studies have demonstrated that many resource users have crafted institutions to govern their own resources and in many instances have sustained these regimes for very long periods of time. The design principles that characterize robust, long-lasting institutional arrangements for the governance of common-pool resources have been identified.
The performance of over 100 irrigation systems in Nepal that are either self-organized by the farmers or constructed and operated by the national govern-ment have been shown. In a multiple regression analysis, controlling the size of the system and several physical variables, it shows that the farmer managed systems outperform the government-managed systems in terms of a composite score based on productivity and water distribution.
Well-crafted empirical studies have also begun to identify variables that are associated with a higher probability of successful organization or failure.
Common-pool resource experiments
The structure of a finitely repeated common-pool resource game has also been examined in experimental studies. In this setting, it has been shown that when appropriators from a common-pool resource are in a minimal institutional situation without any capacity to communicate, signal, and know who each other are, outcomes approach the predicted outcome of the conventional theory. On the other hand, as soon as subjects are allowed to communicate, they achieve better outcomes than predicted by the conventional theory.
Thus, communication should make no difference to the outcomes achieved. Once communication is allowed, however, subjects spend time and effort as-sessing each other’s trustworthiness and reaching agreements about the best strategies they should jointly take.
Predictions of the selected from the individual
In addition to conduced research that has examined the level of cooperation achieved in severe collective-action settings that has challenged the validity of the standard theory, research in the tradition, focusing on ultimatum, dictator, and trust games, examines whether individuals behave as the neoclassical model of individual choice predicts.
Continued Concepts with Conclusions
Considerable agreement now exists related to the importance of diverse institu-tional arrangements in public economies ranging from local to national to global (Aoki, 2001; Ruttan, 2003, 2006; Ostrom, 2005; Young et al., 2006).
Analytical evidence has steadily mounted that demonstrates the capability of humans to design complex systems. Substantial variance in performance has been measured as regards efficiency, equity, accountability, and resilience or these non-market and non-state institutions, but many of them achieve very high levels of performance. What has not been observed, however, is a strong negative association between polycentric organization and performance that underlay the massive earlier campaigns to eliminate multiplicity of governmental units.
Instead of presuming that all complex systems need to be replaced with central-ized orders, growing evidence has mounted that the challenge is developing well-tested theories that enable us to harness complexity.
Consequently, considerable evidence has been combined to support theories related to the structure of public economies and of the capabilities of individuals to self-organize a wide diversity of governance mechanisms. Substantial debate still exists, however, about the micro pillars of these evolving theories.
In some field settings, the classical theory of individual behavior generates empirically confirmed explanatory and diagnostic results. When analyzing commodity auction markets that are run repeatedly in a setting where property rights to private goods are well-defined and enforced at a relatively low cost to buyers and sellers, theories of market behavior and outcome based on complete information and maximization of profits predict outcomes very well. In highly competitive environments, further assumption can be made that the individuals who survive the selective pressure of the environment act as if they maximized their individual utility dependent on a key variable, such as profits, associated with survival in that environment.
Many of the situations of interest in understanding how public economies govern and manage collective goods, however, are uncertain, complex, and lack the selective pressure and information-generating capabilities of a competitive market. Therefore, one strategy for dealing with this problem has been to assume bounded rationality – that persons are intended rational but only limitedly so – rather than the assumptions of perfect information and utility maximization used in the classical theory.
Information search is costly, and the information-processing capabilities of human beings are limited. Individuals, therefore, often must make choices based on incomplete knowledge of all possible alternatives and their likely outcomes. With incomplete information and imperfect information-processing capabilities, all individuals may make mistakes in choosing strategies designed to realize a set of goals.
Over time, however, they can acquire a greater understanding of their situation and adopt strategies that result in higher returns. Bounded rationality is highly likely to be an effective tool for studies of field settings where the researchers may not be able to specify the specific structure of the situations participants face anymore than the participants themselves. Bounded rationality, however, deals primarily with the information condition related to individual choice. A key problem for many scholars has been, however, the appropriate assumptions to make about the values that individuals place on benefits obtained by others.
The challenge of behavioral game theory has generated results consistent with a richer theory of individual valuation. Scholars are now positing a family of individual models that change the basic assumptions of the classical model. Several assumptions are shared across these new theories of individual behavior:

  • Individuals are assumed to have heterogeneous preferences in the same objective situations.
  • Some individuals may include the payoffs obtained by others in their own utility calculation while others may not, and payoffs to others may bring positive, negative, no utility to an individual.
  • Preference may change over time in light of interactions among participants.

Once researchers begin to assume that there are multiple ‘types’ of players interacting in a setting, attention can then be focused on how specific aspects of the structure of the situation affect behavior over time, such as sequential moves, type of feedback, forms of communication, and how individuals were assigned to a position.
Assuming that all individuals have altruistic utility functions is also not a sufficient explanation for experimental findings. ‘Most data support either inequality-aversion or the reciprocal approaches’.
The structure of action arenas is thus created both by the biophysical world (such as the size of a resource, advantages due to location, and predictability) and by the rules used (such as the boundary rules affecting who can be a legitimate participant, whether individuals can communicate and observe each other’s actions, and the specific rules used related to positive payoffs and negative sanctions).
The possibility that there are individuals who take into account the payoffs of other individuals changes theoretical foundations greatly (Hodgson, 1998). Now one needs to ask how individuals provide reliable signals to each other about their preferences and intentions and how they gain information about the actions and outcomes of others. How individuals learn about these factors also strongly affects predicted and actual outcomes. Further, behavior that evolves over time in different structures is also of considerable importance where those who are inclined to seek jointly beneficial outcomes may achieve significantly higher payoffs over time if they are able to identify one another. Once successful ‘contingent cooperators’ are noticed by others, these successful strategies may be learned and adopted more widely in a population. Some of the interesting rules devised by users of common-pool resources through the ages can now be integrated into contemporary theory rather than being relegated to an irrational and incomprehensible past.
Institutional analysis has come a long way from the initial reactions to challenges derived from the public choice approach, the debate over the misfortune of the commons, the innovative work of the new institutional economics, and the challenge of behavioral theory. At the beginning of the twenty-first century, however, strong pillars have been achieved for further research on complex, multitier institutional arrangements and their consequences.