Institution

Institutions can be understood as "a system of interlinked, form-bound (formal) and form-unbound (informal) rules (norms) including the precautions for their enforcement" (Richter/Furubotn 2003, 7) or more simply as 'rules of the game of a society'. Forms-based institutions are, for example, laws and contracts, while customs, vague taboos or manners are informal institutions. By guiding human action and restricting freedom or arbitrariness, institutions provide a framework for interaction processes. Thus, the behaviour of interaction partners can be reliably anticipated, which is indispensable especially in anonymous interactions.

This can be illustrated using online auctions: without rules for conducting an auction (in particular legal regulations on the purchase contract, security guarantees on the part of the auctioneer and possibilities for evaluating sellers), according to economic behaviour theory sellers would accept the purchase price but refuse the associated service. Since potential buyers would anticipate this, online auctions would not take place, although they would be advantageous for the potential contractual partners in each case.

However, the design of institutions to regulate human behaviour in complex systems is a huge challenge: due to numerous interconnections, feedback loops and time delays, among other things, systems often change differently than intended (see, for example, Arndt 2006; Sterman 2000), which is one of the reasons for the special importance of systemic thinking in economic education.