When Order Affects Performance: Behavioral Spillovers and Institutional Path Dependence

To understand how culture might affect institutional performance, we introduce a modeling framework that allows for behavioral spillovers across institutions. We use this framework to explain how, and under what behavioral conditions, institutional performance is dependent on the sequencing of institutions. We argue that institutional performance is path dependent, and that patterns of behavior—culture—drive this path dependence. We derive criteria for optimal sequences of new institutions. We show how growth in culture’s influence increases path dependence only to a point; thereafter, culture creates dependence on initial conditions and the subsequent path loses its influence. We also derive optimal sequences of institutions; they induce behavioral diversity and build on existing productive behaviors to avoid inefficient spillovers. Counterintuitively, these sequences maximize the potential for path dependence in order to avoid its realization. We also derive a general result showing how institutions with weak punishment regimes reduce the likelihood of behavioral spillovers.