A Model of Institutional Change in Transition Economies

Abstract

In this chapter I will introduce a model of institutional change in transition economies, in which the behaviour of agents is affected not only by formal institutions such as new laws and organisations but also by social norms, those old values and habits which influence the shape of new institutions. The analysis is inserted within a political economy framework, where political preferences, social constraints and consensus as well as international conditionality matter. I will argue that institutional costs, which go beyond mere transaction costs, are emerging from the lack of consistency between formal and informal rules, and negatively affect economic performance (an extra cost of transaction). Among FCEs, an important example of this is given in what I call the ‘dichotomy thesis’. Adaptation and changes in the social behaviour of people are difficult and take time, as many surveys today show (New Russia Barometer, 2005;Levada Centre nationwide survey 2008).