Formal enforcement and rationality. The impact of mental models in institutional performance

Abstract

This paper is an essay in the economy of ideas. It analyzes how informal institutions affect the enforcement of key market institutions. It argues that legal traditions, political institutions, and administrative arrangements affect the mental models that people employ to interpret the world of transactions around them. These models in turn are a key to individual choices that affect economic performance. After presenting the existing literature on this topic, the paper presents examples taken from enforcement, collateral and property institutions from Bolivia, Mexico and Peru. It concludes arguing that if reform is sought, these mental models should also be taken into account, alongside the current functional and rational choice approaches of recent literature.