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Formation of Digital Institutions: Some Comments


I just returned from 02138, where I attended a working conference on digital institutions sponsored by the Berkman Center and the Gruter Institute and chaired by my colleagues Oliver Goodenough and John Clippinger. During two (rather intense) workshop days, an impressive line-up of panelists and discussants representing various backgrounds and areas of research – ranging from neuroeconomics, biology to virtual world developers – shared their knowledge about “digital institutions” with each other.

I was asked to frame the theme of a panel with Colin Maclay, Mike Best, and Iqbal Quadir on the formation of institutions in developed and developing economies. I started with a series of questions to be discussed and issues to be considered. First, I offered some thoughts about terminology and key distinctions that I considered being helpful for the discourse. Second, I briefly touched upon core elements that are likely to have an impact on the formation of digital institutions, emphasizing the importance of pre-existing institutional arrangements

Here are my notes:

1) Introducing basic distinctions: What do we mean by the term “institution”?

  • Reviewing the literature in fields of sociology, economics, and law, it’s far from clear what the term means and how it differs from related terms such as “organizations” or “firms”. Generally, definitions of institutions include at least two elements: (a) Institutions consist of a set of rules, plus (b) some sort enforcement regime.
  • Within this broad definition, however, various types of institutions can be distinguished, for example:
    • internal institutions = community enforcement of rules (e.g.: Wikipedia with neutrality of viewpoint rule; enforced through community/peers; P2P file-sharing with strong norms re: sharing [“charismatic code” – cf. Strahilevitz]).
    • external institutions = government enforcement of rules (e.g.: Intellectual property rights)
    • informal institutions = emerge without explicit agreements (e.g.: Blogger ethics, e.g. “Identify and link to sources whenever feasible.”)
    • formal institutions = based on deliberative formation processes (e.g.: ICANN)
  • Similarly, formation of institution varies:
    • spontaneous emergence (e.g.: online discussion groups)
    • authoritative formation (e.g.: Companies providing virtual world platforms are created by entrepreneurs (= authority))
  • Why do we (or should we) care about definitions?
    • Epistemological argument: The way we conceptualize “institutions” shapes the way we perceive (digital) institutions as subject of our research
    • To define means to differentiate: In order to deepen our understanding of formation of institution, we need some degree of granularity. Different types of institutions, e.g., emerge and evolve in different ways
    • Putting together various pieces of knowledge about formation of institutions from different areas of research in order to use it in context of digital institutions also requires a relatively fine-grained picture of the concept “institutions”.
  • However, traditional distinctions may not be 100% feasible for the digitally networked environment. Example: Virtual Worlds (such as Second Life) are at the same time…
    • …internal institutions (avatars create & enforce their own rules) and external institutions (e.g. Linden Lab using EULAs, IP law, etc.)
    • …informal institutions (rules of behavior within the game emerge in part w/out explicit agreements) and formal institution (e.g. enactment of “in world laws/codes in deliberative processes)
  • In fact, first research question as to what extent the distinctions of analog/offline world translate into digital/online world.
    • Possible starting point: Institutional approach to “commons-based peer production” of content (social production beyond hierarchies and price signals; cf. Benkler)
  • For this panel, we use a broad an open terminology; pragmatic approach. Digital institution here includes diverse online phenomena such as Wikipedia, Flickr, eBay, Second Life … but also offline institutions operating in digital environment (e.g. mobile phone networks)

2) Formation of digital institutions: What are important factors that shape the formation of digital institutions?

At least three interrelated and interacting, but analytically distinct elements:

  1. Preexisting institutional arrangements, both “analog” and “digital”
  2. Technology (availability, pricing, development, …); physical and logical layer
  3. Content-related aspect (content “supply” and “demand”; content diversity, quality, etc., but also human factor: ability to process information, knowledge, and entertainment, incl. level of education, literacy, etc.)

Focus on (1) = importance of preexisting institutional arrangements

  • Analog” institutions have huge impact on formation of digital institutions; analog and digital not clearly separable
    • Example 1: Legal system: Consider what is required to establish a Virtual World such as Second Life? [(1) establishing Linden Research Inc.; (2) creating platform – requires everything from corporate law over contract to IPR]
    • Example 2: Economic system: Consider the role of financial system, e.g. micro-credits in low-income countries; cf. Grameen village phones project
  • “Digital” institutional arrangements, too, have impact on formation of new digital institutions
    • Internet: Esp. digital institutions at logical layer of the Net for providing services at content layer (fundamental example: ICANN – domain name system)
    • Offline, but digital: phone networks (incl. mobile) and other infrastructure as prerequisite for digital entrepreneurs (here, intersection with second element: technological development)
  • These few remarks illustrate interdependency and complexity, both at theoretical and practical level. Now: digging deeper in a case-study mode (Iqbal, Mike, Colin) – as one way to deal with complexity.

So far my remarks. After sessions with formal presentations covering issues such as trust and reciprocity, social signaling, stabilizing cooperation, dispute resolution, institution formation, virtual economics, and authentication and several hours of brainstorming, we came up with some sort of loosely joined research agenda as well as two or three more specific project ideas. In my perception, the multi-layered discussions centered around three core questions or perspectives: (1) What have we learned and what can we learn from existing and evolving digital institutions? (2) How could we build or use digital institutions to address or solve specific problems? (3) How can we change the offline environment to support the formation of digital institutions? The two days have made clear that in each area we are only at the beginning of a long, but exciting and promising conversation.


  1. Joseph Savirimuthu

    May 26, 2006 @ 4:16 am


    Excellent take Gasser – this is spooky! I am currently working on a protect that aims to make explicit the ambivalence that surrounds debates on transnational governance and institutional design with regard to “law as a system” and “law as structure”.

  2. Law and Information » Blog Archive » Promises and Limits of a Law and Economics Approach to IPR in Cyberage

    May 19, 2007 @ 4:35 pm


    […] Over the past few weeks, our graduate students at the Univ. of St. Gallen have done quite some heavy lifting in the three courses that I described here. In my own course on law and economics of intellectual property rights in the digital age, we’ve completed the second part of the course, which consisted of three modules dealing with digital copyright, software and biz methods patents, and trademarks/domain name disputes. We were very fortunate to have the support of three wonderful guest lecturers. Professor John Palfrey taught a terrific class on digital media law and policy (find here his debriefing and putting-into-context). Klaus Schubert, partner with WilmerHale, provided an excellent overview of the current state of software patenting in and across the EU, in the U.S., and Japan and made us think about the hard policy questions up for discussion. Last week, Professor Philippe Gillieron from the Univ. of Lausanne discussed with us the legal and economic aspects of domain name disputes and ways to solve them (the focus was on UDRP – in my view a particularly interesting topic when analyzed through the lens of new institutional economics theory, see also here for variations on this theme.) […]

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