18
C H A P T E R O N E
associated with the choices. Otherwise the rules of games play no part in
game theory.” So long as the game theorist has adequately represented
this focal level of analysis, the theorist interested primarily in finding the
solution to a game has no need to dig into the rules, attributes of a commu-
nity, and physical laws that create the structure of the situation. As institu-
tional analysts asked to diagnose why perverse outcomes occur and to
propose ways to improve the outcomes of many action situations, on the
other hand, we have to dig below and learn how rules create the set being
analyzed. One cannot improve outcomes without knowing how the struc-
ture is itself produced (Eggertsson 2005).
As will be discussed in more depth in chapter 5, rules as used in this
book are defined to be shared understandings by participants about en-
forced prescriptions concerning what actions (or outcomes) are required,
prohibited, or permitted (Ganz 1971; V. Ostrom 1980; Commons 1968).
All rules are the result of implicit or explicit efforts to achieve order and
predictability among humans by creating classes of persons (positions)
who are then required, permitted, or forbidden to take classes of actions
in relation to required, permitted, or forbidden outcomes or face the likeli-
hood of being monitored and sanctioned in a predictable fashion (V. Os-
trom 1991).
Well-understood and enforced rules operate so as to rule out some ac-
tions and to rule in others. In a well-ordered human enterprise, some
behaviors are rarely observed because individuals following rules do not
normally engage in that activity in the given setting. It is rare to observe,
for example, that one driver on a public freeway within the United States
will race another driver on that freeway at a speed exceeding one hundred
miles per hour. State highway patrols invest substantial sums in an at-
tempt to enforce highway speeding laws and to rule out excessive speeds
on freeways.
At a racing track, however, one can observe speeds of well over one
hundred miles per hour and drivers directly racing one another in a deter-
mined manner. The rules of a racing track rule in some activities that are
ruled out on a freeway. Anyone driving on a freeway will observe a range
of speeds rather than the single maximum speed mentioned in the speed
limit law. Speed limits illustrate rules that authorize a range of activities
rather than requiring one particular action. Further, enforcement patterns
differ regarding the range of speed in excess of the official upper limit that
will be tolerated, once observed, before a sanction is issued.
It is also important to recognize that rules need not be written. Nor do
they need to result from formal legal procedures. Institutional rules are
often self-consciously crafted by individuals to change the structure of
repetitive situations that they themselves face in an attempt to improve
the outcomes that they achieve.
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D I V E R S I T Y A N D S T R U C T U R E D I N T E R A C T I O N S
ON THE ORIGIN OF RULES
When one is interested in understanding the processes of governance, one
needs to ask where the rules that individuals use in action situations origi-
nate. In an open and democratic governance system, many sources exist
of the rules used by individuals in everyday life. It is not considered illegal
or improper for individuals to self-organize and craft their own rules if
the activities they engage in are legal. In addition to the legislation and
regulations of a formal central government, there are apt to be laws
passed by regional and local governments. Within private firms and vol-
untary associations, individuals are authorized to adopt many different
rules determining who is a member of the firm or association, how profits
(benefits) are to be shared, and how decisions will be made. Each family
constitutes its own rule-making body.
When individuals genuinely participate in the crafting of multiple layers
of rules, some of that crafting will occur using pen and paper. Much of
it, however, will occur as problem-solving individuals interact trying to
figure out how to do a better job in the future than they have done in the
past. Colleagues in a work team are crafting their own rules when they
might say to one another, “How about if you do A in the future, and I
will do B, and before we ever make a decision about C again, we both
discuss it and make a joint decision?” In a democratic society, problem-
solving individuals do this all the time. They also participate in more
structured decision-making arrangements, including elections to select
legislators.
WORKING RULES
Thus, when we do a deeper institutional analysis, we attempt first to un-
derstand the working rules that individuals use in making decisions.
Working rules are the set of rules to which participants would make refer-
ence if asked to explain and justify their actions to fellow participants.
While following a rule may become a “social habit,” it is possible to make
participants consciously aware of the rules they use to order their relation-
ships. Individuals can consciously decide to adopt a different rule and
change their behavior to conform to such a decision. Over time, behavior
in conformance with a new rule may itself become habitual (see Shimanoff
1980; Toulmin 1974; Harre´ 1974). The capacity of humans to use com-
plex cognitive systems to order their own behavior at a relatively subcon-
scious level makes it difficult at times for empirical researchers to ascertain
what the working rules for an ongoing action arena may actually be in
practice. It is the task of an institutional analyst, however, to dig under
surface behavior to obtain a good understanding of what rules partici-
pants in a situation are following.
6