An examination of the conceptualization of endogenous change

By Elize Kaulina

Explaining the mechanics of endogenous change has proven to be one of the most difficult tasks of institutional analysts, who have sought to attribute the cause of an observed change of an institutional framework to a choice of the individuals operating within its constraints. This poses a paradox for the investigators, as the purpose of an institutional framework is to provide certainty and stability to repeated interactions between a set groups of individuals. The configuration of the framework originates from repeated exchanges, with the outcomes over time representing the various positions of the institutional equilibria.

The choice of an individual depends on his preferences (interests) and beliefs (knowledge about the environment), which determine the utility he (believes) to have from any possible outcome; consequently, having observed the resolutions of exchanges, institutional theorists have attempted to infer and model the potential expected utility models of the actors involved, in terms of the potential constraints to their exchange, responsible for yielding the observed outcomes. With the actors remaining the same, institutional theorists have been able to attribute the change in institutional equilibria to external factors, which alter the belief systems of said individuals by providing them with new information, changing the “tools” they possess for pursuing their interests; the next exchange between the individuals already takes place in the new institutional framework.

The mechanisms through which exogenous factors can alter the outcomes of exchange in an institutional framework is relatively easily conceptualized, and seldom contested by institutional theorists. On the other hand, endogenous change would require that a repeated exchange between individuals would have different outcomes despite no new information altering the beliefs of the actors involved; consequently, endogenous change would have to originate from a change in the preferences of one of the individuals. Unfortunately, whereas Expected Utility Theory roots the beliefs of an individual in the knowledge he has, which in theory is easily attributable to “information available”, the origins of an individual’s preferences are far more complex, perhaps providing a key insight into the difficulties institutional theory in conceptualizing the sources of endogenous change in practice.