Foundations of Developmental Policy Failure: Power, Informal Institutions, and Second-Order Collective-Action Problems

Why do well-intentioned reforms of formal institutions so often fail to resolve developmental challenges, such as corruption? Inclusive development requires resolving collective action problems (CAPs). There are two basic types. First-order CAPs concern free riding related to public goods, externalities, and common resources—all broadly defined to include social and political interactions. Second-order CAPs concern orchestrating the requisite coordination and enforcement to render agreements on first-order CAPs credible, and hence implementable. Why follow an agreement one does not trust? This underutilized concept of second-order CAPS bridges economic and political reasoning because enforcement entails exercising power. Across large populations, institutions can facilitate resolving both types of CAPs, yet when formal institutions lack compatibility with underlying informal institutions, notably social norms, dysfunction follows—generating new CAPs. Whereas formal institutions may, in principle, indicate pathways to resolving first-order CAPs, informal institutions condition prospects for credible coordination and enforcement. Laws and policies that violate established norms rarely achieve intended objectives. Transparency mandates and outlawing bribery often fail when corrupt practice becomes the norm for conducting exchange. Powerful beneficiaries, exercising institutional entrepreneurship, utilize and manipulate prevalent norms to sabotage implementation—reinforcing corruption’s social foundations. Unequal distributions of power may thus derail well-intentioned policy reforms, especially in societies with clientelist (multipolar) political settlements that encompass weak formal institutions and manipulable norms. This paper outlines a theoretical framework for inquiry into these issues. It merges the following approaches: conceptualizing institutions, especially norms, as shared mental models that shape public understandings of political/economic interactions; a systematic approach to triadic exercises of power involving three or more poles of interaction, such as financiers, landlords, and tenant laborers; the role of institutional (normative/political) entrepreneurs; and relatively straightforward game-theoretic reasoning. This approach offers a preliminary conceptual platform for policy analysis regarding dilemmas of inclusive development.