Institutional evolution and change: Interstate banking reform in the United States

This dissertation is an investigation of evolution and change in interstate banking regulation in the United States. Interstate banking reform is an example of institutional change in a very complex political-economic system: a polycentric system that produces, provides, and regulates a quasi-public good. As originally formulated by V. Ostrom, Tiebout, and Warren (1963), polycentric public-economies have many centers of decision making that are formally independent of each other. Unlike hierarchical governance systems, polycentric systems have no single source of authority. Hence, collective action in this type of governance system poses fundamental questions about political-economic behavior and institutional change that are not addressed in the existing literatures on regulation or political economy. The dissertation begins to address some of these questions systematically using a structured case study approach and decision-theoretic techniques. Analysis of economic and institutional change in the U.S. commercial banking industry over the period 1960–1994 suggests that interstate banking reform was driven by a change in relative prices that negatively affected banks' competitive position, and the existence of a lender of last resort rule. This combination of economic conditions and institutional arrangements created incentives for banking firms, interest groups, regulators, and legislators to coordinate to make institutional change. Change behavior was boundedly rational and both efficiency-seeking and rent-seeking. Firms, interest groups, and regulators led the change process. State legislators responded to changes in economic conditions and the actions of other states. While Congress played a leadership role in putting interstate banking reform on federal and state legislative agendas, it delayed legislative action until consensus had been reached on key principles. More generally, it is argued that participants in a polycentric system will coordinate to make institutional change when political-economic conditions and institutional arrangements combine to create a mutual interest in change. Participants' ability to overcome collective action problems and to make change depends critically upon constitutional arrangements that govern independent and joint problem-solving activities.