Rules And Formal Rules For Informal Rules

1495 WordsApr 22, 20176 Pages
Institutions are defined as a set of formal written rules and informal unwritten rules and the mechanism of their implementation. Informal rules comprise of conventions, norms of behaviour and self imposed attributes like honesty, etc. while the codes of conduct like honesty are self-imposing like the conventions. Behavioural norms are imposed by others. The efficacy of behavioural norms depends on how effectively they are implemented. The genesis and the degree of alteration in the formal rules are not similar to that of informal rules. A change in the formal rules is accomplished through a careful plan of action by political, judicial or economic authorities. The changes in the formal rules also affect the informal constraints. However,…show more content…
These incentives, at the end, determine the growth path of an economy. It is the political institutions that formulate and implement the formal economic constraints such as the property rights. Whether the political negotiations are efficient or not, is influenced by the political institutions. This, in turn, determines the economic results. Institutions are meant to reduce the impact of the relative price variations thereby acting as a stabilizer. Yet the institutions that are able to ensure the element of stability need not always be the efficient ones. It is only a necessary condition for institutions to be efficient but not a sufficient one. Changes in relative prices and changes in preferences are considered to be the two primary causes of change in the institutions. This change is brought about by the entrepreneur, political or economic, who acts as the agent. The institutional structure of an economy undergoes a change in response to the activities undertaken by economic and political organizations for profit-making ventures. The dissimilarity in the institutional framework of England and its North American colonies with Spain and Portugal is worth noting. The erstwhile built institutions were characterized by political democracy, stability and economic progress. In contrast, the Latin American region was marked by centralized administrative authority and a heavily controlled economic setup. This situation persisted well into the future. Such an
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