The Competitiveness of Archaic Practices : Towards a Theory of Institutional Stability and Institutional Change

From a theoretical point of view, explaining institutional stability and institutional change has remained a difficult task. The new institutional economics initially identified economic efficiency as the main driver of institutional change. In more recent times, it has been recognized that efficiency considerations alone don't always account for institutional change, and that the direction of change may significantly be affected by cultural factors and cognitive limitations. Conceptualizing these seemingly intuitive notions has proven very difficult. In this paper, I introduce the concepts of mutually reinforcing practices and of belief networks to explain several to account both for institutional stability and institutional change. I illustrate the usefulness of these concepts by focusing on several puzzling practices of marine insurance. I show that transaction costs and cognitive limitations are poor explanations of the entrenched nature of these institutions. I demonstrate that networks of beliefs and practices are a better explanation of the stability of these institutions. In a second step, I focus on two critical events, the crisis of the international maritime industry and exogenous regulatory and economic shocks, as an opportunity to better understand the mechanisms of institutional change. Central to this discussion are two questions: why did these changes occurred only in the late 20th century and not earlier, and what may account for the direction of the observed institutional change. I show that neither efficiency nor power explain this institutional transition. I identify three key factors that have triggered this transition, generalized uncertainty, periodicity, and economic impact. Finally, I provide some evidence for the hypothesis that updated practices of marine insurance are compatible with an institutional transition that minimizes changes to existing belief networks