W Richard Scott. Encyclopedia of Social Theory. Editor: George Ritzer, Volume 1, Sage Reference, 2005.
Institutional theory examines the processes and mechanisms by which structures, schemas, rules, and routines become established as authoritative guidelines for social behavior. It asks how such systems come into existence, how they diffuse, and what role they play in supplying stability and meaning to social behavior. It also considers how such arrangements deteriorate and collapse, and how their remnants shape successor structures.
One of the dominant theoretical perspectives at the end of the nineteenth century, institutional theory was eclipsed by other approaches during the first half of the twentieth century. In recent decades, however, institutional theory has experienced a remarkable recovery, entering the new century as one of the most vigorous and broad-based theoretical perspectives in the social sciences.
Institutional theory is not a single, unified system of assumptions and propositions, but instead a rather amorphous complex of related ideas—a broad theoretical perspective or family of approaches. Older, nineteenth-century versions built on and incorporated contributions from economists, political scientists, and sociologists. Contemporary versions have drawn renewed energy from developments in cognitive psychology, ethnomethodology, the new cultural studies within anthropology and sociology, evolutionary and transaction-cost economics, and recent advances in social history.
Although diverse, institutional arguments cohere around the central tenet that “institutions matter” in accounting for social behavior. Institutional arguments exhibit a lean common core of assumptions: (1) institutions are governance structures, embodying rules for social conduct, (2) groups and organizations conforming to these rules are accorded legitimacy, a condition contributing to their survival, (3) institutions are characterized by inertia, a tendency to resist change, and (4) history matters, in the sense that past institutional structures constrain and channel new arrangements. Built on this bedrock are diverse approaches that vary along important dimensions: individual actor versus structural approaches, debates over the bases of institutional stability, the role of rational choice versus more relaxed theories of decision making, the relative importance of interests and ideas, and divergent views concerning the appropriate level of analysis.
Contemporary approaches can be roughly categorized into three clusters based primarily on which aspects of governance structures are privileged. Rational-choice theorists emphasize the regulatory aspects of institutions and focus attention on the design and construction of institutional frameworks to support collective action. Normative theorists attend to the ways in which values and commitments generated in interaction shape, undermine, and augment formal and official regimes. And cultural-cognitive theorists stress the importance of widely shared assumptions and beliefs and the construction of social identities as the underpinnings of social order.
Many substantive arenas have been informed by institutional analysis, including modernization processes at the global level, emergence of international regimes, structuring of organizational fields, competition among organizational forms (or populations), design of organizational structures, and the diffusion of innovations among social entities.
Early Institutional Theorists
Many of the best known and most influential social theorists working at the turn of the nineteenth century were institutionalists albeit of varying flavors. Economists such as Gustave Schmoller, John R. Commons, and Thorstein Veblen emphasized the importance of examining the historically varying rules governing economic transactions, and suggested that the role of rationality had been overemphasized and that of habit and convention neglected in the examination of economic behavior. These theorists, and their intellectual descendants—including Joseph A. Schumpeter, John Kenneth Galbraith, and Gunnar Myrdal—departed from the assumptions guiding mainstream economists by emphasizing indeterminacy over determinacy in causal models, exogenous over endogenous determinants of preferences, behavioral realism over simplifying assumptions, and a greater interest in examining change and variation over place and time rather than stylized models of economic equilibrium.
Also active at the beginning of the twentieth century were a number of political scientists who examined the construction and functioning of political institutions ranging from the legal structure of constitutional systems to the activities of administrative agencies. Theorists such as John William Burgess, Woodrow Wilson, and Westel Woodbury Willoughby stressed the study of formal political structures, providing configurative descriptions of intricate systems of interlinked rules, rights, and procedures. These efforts were overshadowed and eventually supplanted by the development within political science of the behavioralist approach, which diverted attention from institutional structures to political behavior, including voting, party formation, public opinion, and informal influence.
By far the largest and most influential collection of early institutional scholars were the giants of sociology, including Karl Marx, Émile Durkheim, Max Weber, Herbert Spencer, and Charles Horton Cooley. Particularly in his early work, Marx noted the role played by ideological structures, which rose to provide justification and legitimacy to (exploitative) political and economic systems. Durkheim, primarily in his later work, stressed the pivotal role played by symbolic systems—systems of belief and “collective representations”—that, although a product of human interaction, are experienced by individuals as objective “social facts.” These “crystallized” systems, perceived by the individual to be both external and coercive, are social institutions. Weber embraced the institutionalist argument that the study of economic and political systems needs to be historically informed and comparative. His studies on the effects of religious belief systems on economic behavior and on the rise of “rational-legal” administrative systems provided the foundation for decades of productive comparative scholarship relating cultural systems and social structures. Spencer viewed societies as organic systems made up of specialized subsystems, each of which fulfilled its functions through distinctive institutional arrangements. He, along with his intellectual colleague, William Graham Sumner, carried out comparative studies of these institutions as they varied across societies. Cooley emphasized the interdependence of individuals and institutions—the extent to which individuals create great institutions, including language, government, religion, and laws, which, in turn, constrain and guide individual behavior.
More so than was the case in economics or political science, sociologists continued the tradition of institutional research uninterrupted through the twentieth century. Scholars such as Everett C. Hughes, Talcott Parsons, George Herbert Mead, and Alfred Schutz continued to examine the interdependence of institutions and individuals, Hughes and Parsons emphasizing more the macro-micro direction, Mead and Schutz, the micro-macro influences. Much research in arenas as varied as industrial relations, occupational systems, stratification, race relations, marriage and family, and gender takes account of the pervasive influence of institutional frameworks on social life.
Modern Theoretical Developments
These many threads of institutional scholarship have evolved into three principal contemporary strands of theoretical work: rational choice approaches, favored by most economists, many political scientists, and a smaller number of sociologists; normative approaches, pursued primarily by sociologists and some political scientists; and cultural-cognitive approaches, developed by cultural anthropologists and sociologists and utilized particularly by organizational sociologists and management scholars.
Rational Choice Theory
Institutions are viewed as governance or rule systems created by individuals seeking to promote or protect their own interests. Although institutions regulate and constrain individuals, under some conditions individuals recognize that their goals can be more effectively pursued through institutional action. This explains why individuals are motivated to construct systems that constrain their own behavior. Early, more heroic versions of rational actors assumed that the individual actor engages in utility-maximizing behavior, guided by stable preferences and possessing complete knowledge of the possible alternatives and the consequences associated with each choice. These have been replaced with models acknowledging that individual rationality is “bounded” by information and calculation limitations. Nevertheless, individuals are seen as intendedly rational, doing the best they can to satisfy their wants. More so than the other approaches, rational choice theory embraces an atomist view, focusing on individual preferences and choices as the basis for explaining social behavior, including the construction and utilization of institutions.
The most widely employed variant of rational choice theory is transaction cost economics, inspired by the work of Ronald Coase and elaborated and enriched by Oliver E. Williamson. Building on the earlier insights of Commons, Williamson argues that economic behavior consists fundamentally of transactions—exchanges of values among individuals. To safeguard the interests of the parties, more or less explicit contracts are devised to govern behavior. As the transactions become more complex and the outcomes more uncertain, the cost of negotiating and policing contracts increases. Individuals are motivated to construct governance structures (regulative institutions)—for example, property rights protections, organizational hierarchies, trade associations, political regimes—in order to reduce such transaction costs. The task of the institutional scholar is to determine what types of governance structures are best equipped to address what types of transaction costs.
Transaction cost economics has been employed to address a wide variety of economic problems, including the design of market systems, corporate structures, labor contracts, franchise bidding, antitrust law and enforcement regimes, and the formation of alliances. A growing number of political scientists, including Elinor Ostrom, Terry Moe, Kenneth A. Shepsle, and Barry Weingast, have adapted this theory to account for the regulation and structure of public organization, including the design of treaties and alliances among nations, legislatures, cabinets, committees, and administrative agencies.
Two other subfields of economics also embrace a rational choice perspective in accounting for the design of institutions. Principal-agent theory is designed to address situations in which one party, termed the “principal,” seeks to achieve some outcome but requires the assistance of others, termed “agents,” to carry out necessary activities. The theory provides guidance for the construction of control and incentive systems—regulative institutions—that attempt to align the interests of the cooperating parties. A second approach, game theory, conceptualizes the problem of pursuing one’s interests in interdependent situations as a set of games between actors. The problem for actors is to construct a payoff matrix (distribution of rewards) that will enable them to achieve their interests with minimal costs. In one influential study, Robert Axelrod employed the Prisoners’ Dilemma situation to evaluate the conditions under which individuals who pursue their own self-interest in the absence of a central authority will devise incentives to reinforce cooperative behavior.
Normative Theory
A second cluster of theorists emphasize that institutional systems rest primarily on a normative foundation. Normative systems are composed of shared norms and values that introduce a prescriptive, evaluative, and obligatory dimension into social life. Rules are not simply externally enforced, but internalized by actors. Informal systems of interpersonal ties and mutual obligations are central components of viable institutions.
Long an important tradition in sociology, particularly schools associated with Chicago and Columbia University championed the normative view of institutions. At Chicago, Robert E. Park, Everett C. Hughes, Erving Goffman, and Howard S. Becker carried institutional analysis forward. Most of this work was of an ethnographic character, and much focused on the microprocesses by which individuals attempt to limit the power of institutions, making room for more creative and personal arenas of action. At Columbia, Robert K. Merton provided leadership to an important cluster of organizational sociologists, including Peter M. Blau, James S. Coleman, Alvin W. Gouldner, and Philip Selznick, who examined the interdependence of formal and informal systems of conflict and cooperation. Selznick developed the most explicit theory of institutionalization as the process by which, over time, organizations, created as technical systems, become “infused with value.” Vested interests are created, sunk costs exist in the form of capital equipment and member training, allegiance is developed to leaders and values, commitments are made to external parties, and, overall, the behavior of the organizations becomes more predictable and stable. This version of institutional theory has been carried on and enhanced by the work of Jerome Karabel, Charles Perrow, and Arthur Stinchcombe, among others.
Within political science, James G. March and Johan P. Olsen have challenged the turn toward individualistic, utilitarian, and functional arguments characteristic of rational choice theorists to advocate a return to a recognition that important values are embedded in institutional systems. Most social organizations, political and economic, are governed by rules, and most participants within organizations view themselves as carriers/spokespersons for them. Decisions made by these participants are less likely to be governed by a “logic of instrumentality,” involving calculated choices to maximize that individual’s utility, than by a “logic of appropriateness.” Participants determine the nature of the situation, reflect on the nature of their own role or identity, and act accordingly. Most behavior, most of the time, is governed by routines, procedures, conventions, roles, and rules, as emphasized by the earlier work of Herbert A. Simon.
Historical institutionalism is a related approach pursued by political scientists and political sociologists. This school emphasizes the extent to which existing institutional systems affect subsequent arrangements and directions of change. Thus, decisions made in the early stages of institutional development will continue to influence later decisions; and even when existing systems are overturned, they will affect efforts to devise replacement structures. Such effects reflect “path dependence” in a series of actions, as initial institutional choices have continuing effects on policy choices and governmental performance. Research by Peter A. Hall, Stephen D. Krasner, and Theda Skocpol, among others, document these processes across a wide variety of governmental systems.
Cultural-Cognitive Theory
Cultural-cognitive theory represents the most recently developed conception of institutional structures and processes. The theory draws on the seminal work of Peter L. Berger in phenomenology, the ethnomethodological studies of Harold Garfinkel, and the cultural anthropology of Mary Douglas and Clifford Geertz, who stress the semiotic dimensions of cultural systems. The core elements of institutions from this perspective are the shared conceptions that define the nature of social reality. This reality is developed in social interaction among individuals as they create and share interpretations of what is going on, on both micro and macro levels. Over time, on a micro level, individuals create and come to share common understandings of the nature of their situation (playground, workplace), and these understandings are passed along to others who join the group. Similarly, at more macro levels, people create shared symbols (language) and shared understandings (religion, science) that define social reality, shaping the understandings and cognitive processes of participants.
These ideas have been vigorously pursued by sociologists, who have applied them to the analysis of organizations, organizational populations, nation-states, and, more generally, to the diffusion of innovations among social entities defined as similar. Paul J. DiMaggio, Walter W. Powell, John W. Meyer, and W. Richard Scott, among others, have pursued the development and application of these arguments at the organization level. Meyer and Scott stress the extent to which organizational structure and behavior is shaped not only by technical considerations but also by cultural rules promulgated within their wider environment regarding “rational” organization. In this view, rationality is often a cultural construction, beliefs taking the form of rules specifying procedures that are asserted to produce desired ends. DiMaggio and Powell delineate the various mechanisms—coercive, normative, and mimetic—by which organizations are induced to embrace these rules, and point out that rules vary across industrial sectors or fields occupied by organizations. Institutional pressures exist in all fields that induce organizations to conform to cultural rules, to become isomorphic to these models in their structures and procedures. Such conformity brings legitimacy, which, in turn, affords access to resources needed to survive.
This work challenges views privileging individual actors as the focus of action. Rather than being agents, individuals are more often subjects: recipients of scripts that they enact as constructions of institutionalized cultural environments. Similarly, individual organizations are viewed not as autonomous, instrumental actors but rather as embedded in, shaped and permeated by, wider institutional environments.
Other sociologists, including Glenn C. Carroll, John Freeman, and Michael T. Hannan, examined the emergence and growth of distinctive types (populations) of organizations. Although early models were based on ecological arguments, as advanced by Amos Hawley and other urban sociologists, that emphasized the role played by competition over resources, Carroll and Hannan recognized that the growth of new populations of organizations was also shaped by the growing acceptance and recognition of these forms as appropriate vehicles of collective action. “Social fitness” was as important as economic efficiency in determining the survival of a new organizational form. The increasing prevalence of an organizational form signals its increasing legitimacy, particular arrangements coming to be seen as the “natural” way to organize to perform certain activities. In addition to the effects of increased density on vital rates of foundlings and failures, other ecologists such as Joel A. C. Baum have examined the role of institutional embeddedness—the effects of numbers of ties between a population of organizations and its institutional environment—in enhancing survival chances of the form.
Meyer and colleagues have applied cultural-cognitive arguments to examine the effect of developments in cultural rules at the world-system level on the characteristics of nation-states and societal systems. As first described by Immanuel Wallerstein, the absence of a unified sovereign for the world system allows greater play for cultural models touted as universal rules. The models are generated and promulgated by a wide range of quasi-governmental and nongovernmental interest groups and associations. Rather than viewing nation-states as independent actors, Meyer and associates, including John Boli, Francisco O. Ramirez, and George M. Thomas, see these units as embedded in a wider, rationalist culture that largely determines the forms they may assume and the success of their endeavors. What kinds of administrative agencies and programs are adopted by states, what rights are accorded their citizens, how educational systems are structured, what data systems are created to monitor progress—these and many other features more closely reflect the number and range of linkages between a given nation and the world system than that nation’s economic development or specific societal needs. These structures and programs are adopted by nation-states to signal that they are legitimate players on the world scene.
Arguments stemming from cultural-cognitive versions of institutional theory have rejuvenated studies of the diffusion of innovations. Early studies of diffusion were informed largely by network theory or by arguments stemming from regulative and normative conceptions of institutions. Cultural-cognitive theory points out that, in order for ideas to flow among entities, those entities must be theorized to be similar and the innovations themselves must be theorized as functionally effective, accounts being devised concerning what components are necessary and how they are aligned to be effective. The more modernity is touted as a desirable general value, the more pressure is placed on units—individuals, organizations, nation-states—to embrace the latest innovation. And the more widely broadcast such innovative models are within a society, the less important specific relational ties or network locations are in accounting for instances of diffusion. Relational models need to take into account the effects of the wider cultural context.
Levels of Application
Institutional theories have been applied to a wide variety of social phenomena, ranging from interpersonal to world-system levels. Ethnomethodologists conducted detailed studies of the emergence through interaction among workers of informal rules and routines that helped them make sense collectively of their common enterprise. Lynne G. Zucker devised experiments to demonstrate how standards thought to reflect more impersonal organizational roles were more likely to resist change attempts and to be transmitted to successors than standards associated with individual judgments. Game theoretic models also focus on interpersonal systems. Some game theorists embrace a more formalist approach, examining the possibility of designing rule systems that can lead to specified equilibrium outcomes. Others take a more behaviorist stance, examining the emergence of unplanned and unintended social conventions that act to regularize the conduct of participants.
Much research guided by institutional arguments has been conducted at the organization level. Early research by normative theorists such as Selznick examined the ways in which ideological and interpersonal commitments evolving over time between individuals within and external to organizations constrained degrees of freedom of subsequent action. Selznick’s approach spawned an active school of organizational studies as sociologists carried out natural histories of organizations, principally schools and voluntary agencies, to document the ways in which these systems develop distinctive “character structures”—institutionalized routines and scrips that channel and confine action possibilities. More recent managerial research has continued and extended this tradition to examine the development and function of corporate culture. In other research utilizing normative models, following in the tradition of Weber, Reinhard Bendix conducted historical, comparative research on the varying normative underpinnings that legitimate authority systems within organizations. Later scholarship by Mauro Guillén examined factors affecting the diffusion across selected societies of major managerial models, such as scientific management and human relations.
Williamson’s transaction cost version of institutional theory has guided much research at the organization level. “Make or buy” decisions—whether to produce goods and services within a firm or to purchase them from others—can be viewed as reflecting more fundamental decisions concerning where to locate the boundaries of the organization. Transaction cost arguments also inform the design of organizational structures—whether to employ a unified or multidivisional model, a hybrid or an alliance structure. Political scientists, as noted, have adapted transaction cost models to guide studies of political structures. In one interesting application, Terry Moe’s study of federal agencies in the United States such as the Consumer Product Safety Commission and the Environmental Protection Agency suggests that when there are strong ideological differences between parties, it is rational for politicians to devise inefficient agencies for fear that the opposition could employ an effective agency to pursue its goals.
The advent of cultural-cognitive models has encouraged organizational scholars to shift attention from the individual organization to the organizational population and organizational field level. In order to show that organizations embody cultural models developed and promoted within the environment, wider lenses are required along with comparative and historical studies. Studies of a diverse range of organizational populations—including automobile companies, banks, brewers, day care centers, thrift companies, publishing houses, semiconductor firms, and trade associations—have employed time series (frequently, event-history) data, often extending over the entire history of the form, to examine factors affecting the populations’ growth and decline. As previously noted, while early theories focused primarily on competition for scarce material resources, later work has attended to institutional factors affecting population processes.
Organizational field (or community) research attends to wider arenas containing numerous types of interdependent organizations performing similar or related functions and linked by a common meaning system. Among the fields that have been empirically examined are alternative dispute resolution, art museums, transnational commercial arbitration, environmental regulation in U.S. chemical and petroleum industries, health care systems, mutual fire insurance companies, Norwegian fisheries, radio stations, Scottish knitwear, and solid waste management. Studies examine the emergence of a stable interaction order, shared meanings and institutional logics, a division of labor among organizations exhibiting a limited set of organizational archetypes or models, and overarching governance structures. As they mature, fields are expected to become more highly structured over time, although fields often decline and disintegrate.
Research has also been conducted at the societal level, examining nationwide frameworks around which business or other forms of activity are organized. For example, Neil Fligstein has examined the evolution during the twentieth century of the “field” of largest U.S. corporations. Models of corporate governance have evolved from early periods emphasizing entrepreneurial control to later models of manufacturing, sales, and financial controls. Regulatory policies pursued by the U.S. government have been greatly influential in affecting what models of organizing are selected. Comparative studies by scholars such as Nicole Biggart, Gary G. Hamilton, and Richard Whitley have examined the effects of wider institutional structures and the organization of economic activity in Europe and Asia.
At the international level, political scientists—both rational choice and historical institutionalists—have developed competing versions of regime theory in order to account for the development of rule systems and ordered patterns of interaction between nation-states. Scholars in this area examine the creation and operation of trade agreements, treaties, and broader multipurpose entities such as the European Union. Rational choice theorists examine the motives leading self-interested nation-states to cooperate in establishing such binding institutions as well as the regulatory systems designed to curb opportunism and enforce compliance. Historical institutionalists focus on the effects of prior conditions and experience on regime design and attend to the unexpected, historically contingent evolution of the cooperative framework. Political sociologists have examined the rise in the number and influence of international nongovernmental associations as well as the increasing use of standardization regimes as a substitute for market and bureaucratic controls.
Continuing Issues, New Directions
Viewed as a complex of ideas, there seems little doubt but that institutional theory has generated much interest and spawned much productive scholarship, particularly since the 1980s. However, it remains the case that the collection of ideas is distressingly diverse and, as has been detailed, contains inconsistent and conflicting assumptions and arguments. It is not obvious that the differences separating the rational choice, normative, and cultural-cognitive variants of institutional theory will be quickly or easily resolved. In addition to these internal conflicts—family quarrels—institutional arguments share certain common features that critics have identified. Two criticisms are considered and efforts to address them briefly described. First, it is noted that institutional theory is too preoccupied with controls and constraints and neglectful of the importance of choice and innovation. Second, critics point out that institutional theory gives too much attention to stability and not enough to the sources of change.
Constraint and Agency
Throughout the history of social science, there has been an abiding tension between theories that emphasize stability and order and those that emphasize choice and innovation. Institutional theory has consistently emphasized order, although rational choice versions insist that the creation of controlling structures is motivated by self-interest and requires human agency: the ability of actors to “make a difference” in the flow of events. Normative and cultural-cognitive theorists counter by pointing out that actors are always embedded in ongoing social systems that shape their interests and restrict their choices. These positions are combined and somewhat reconciled by Anthony Giddens’s theory of structuration. He points out that all behavior is grounded in some ongoing social structure but that this structure is continually being reproduced and altered by participants’ behaviors. Structure is both the context for and the product of action. Moreover, structures are constituted so that some occupants are better situated to propose new rules or ways of acting than are others. In short, agency is socially constructed. Not only human, but also social and cultural capital varies over time and place. Whereas early theory and research emphasized commitments and constraints on individual actors and pressures toward isomorphism on organizations, more recent work stresses individual differences in the attributes and relational connections of individuals and organizations. Arguments promulgated by Christine Oliver raise the possibility of strategic action in institutional contexts.
Institutional Change
During the early decades of institutional theory, if institutional change was considered, it was to examine the spread or diffusion of given forms or processes—the study of convergent change—as institutions become more firmly entrenched. More recent theory and research gives increasing attention to deinstitutionalization and discontinuous change processes. The erosion of beliefs and rules and their replacement by new models and forms may be due to endogenous strains and conflicts or to the intervention of external forces or actors. Change is often initiated by the collective mobilization of disadvantaged actors who challenge existing systems and truths. The examination of such processes is well under way as a result of increasing interaction and collaboration of institutional and social movement scholars. Change also occurs when boundaries buffering social fields or sectors are breached, allowing ideas and actors from one sector to penetrate another. For example, fields long controlled by professional logics—including accounting, medical care, and publishing—have increasingly been destabilized and reorganized under neoliberal market and managerial logics.
Institutionalists have also attended to the three great transformations currently under way in sociopolitical arrangements at the international level: the fall and dismantling of the Soviet Union with its ramification for Eastern Europe; the surprisingly rapid evolution of the common market and the design of new political institutions for Western Europe; and the economic modernization of China and other East Asian countries. Among the common themes in the work of such scholars as David Stark and John L. Campbell are the ways in which previous political and economic institutions continue to influence emerging ones; the extent to which cultural and political processes influence the creation of market regimes; and the innovative ways in which existing social and cultural building blocks are reassembled and redesigned, through processes termed “bricolage,” to form new institutions.