Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1144: Status Quo Institutions and the Benefits of Institutional Deviations

Niklas Elert () and Magnus Henrekson ()
Additional contact information
Niklas Elert: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Magnus Henrekson: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: We nuance the widely held view that well-functioning institutions are the ultimate prerequisite for innovation and entrepreneurship. This is done by putting the spotlight on the role that formal and informal institutions have in serving the economic status quo, conserving old habits and incumbent economic interests. Therefore, existing institutions often act as impediments to entrepreneurship and innovation. We argue that a common yet underappreciated source of institutional change arises when individuals deviate from the behavior stipulated by existing institutions. All types of deviations are certainly not beneficial, but when they take the form of innovations introduced by entrepreneurs, they can be a powerful source of economic and institutional change. An institutional setup should strike a balance between the need for stability that protects people’s expectations and flexibility and adaptability to innovations and the ensuing entrepreneurship.

Keywords: Regulation; Norms; Innovation; Entrepreneurship

JEL-codes: L50; M13; O31

16 pages, First version: December 8, 2016. Revised: March 15, 2017.

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