Ideas, institutions, and incompleteness

We propose a framework for institutional change in the ‘rules-in-equilibrium’ tradition and introduce the term institutional incompleteness. Institutions are incomplete when their constituent rules fail to induce behavioural beliefs about the strategies of others and hence fail to achieve an equilibrium. Even with deliberate preparation ex-ante, there will always be unanticipated situations not covered by the rules that can only be settled ex-post, especially in a complex and changing environment. At this crux, people creatively invoke focal point generating ideas. Ideas act as guides for coordination where rules cannot. If no focal points can form, further institutional collapse occurs. To understand which ideas guide better, economists will have to investigate an idea’s content. Our theory offers a way to look at institutional change due to incompleteness while also allowing the requisite room for ideas in explaining the patterned yet indeterminate trajectory of humanity.