Self-efficacy and institutional persistence: an experimental approach

Institutions are believed to emerge from the combined effects of many individual decisions making processes (Greif and Laitin, 2004). In fact, it is widely recognised that institutions are not top-down formations but rather voluntary agreements agents make to implement a specific arrangement (Kosfeld et al., 2009). Institutional change, hence, depends on how people learn to make choices and filter the available information concerning the behaviour of others. The emergence of new rules of the game is affected by learning processes. In economics and political science, social learning phenomena are often referred as “informational contagion or cascades” (Arthur and Lane, 1993; Anderson and Holt, 1997; Bikhchandani et al., 1992). Theoretical models predict that when individuals discard private information and choose on the basis of the behaviour displayed by others, a neat path-dependent dynamics with long term stability – highly dependent on early events in the choice sequence – can emerge. In some cases, social learning can act as a vehicle for the diffusion of maladaptive behaviour and lock society into an inefficient choice path. According to Bandura’s social learning theory (Bandura and McClelland, 1977), learning processes are the dynamic result of the interplay between external sources of influence and self-efficacy perceptions. These represent the beliefs people hold on their own capabilities and they are developed as a consequence of mainly personal and peers’ experiences, and verbal persuasion. Self-efficacy influences the goals people wish to pursue as well as the degree of control they are able to exercise over external environments. Thus, through learning, self-efficacy impacts institutional change. Building upon the above mentioned streams of literature, in this paper we investigate firstly whether and how self-efficacy levels affect learning processes. Secondly, we will explore the conditions under which social learning processes lead to institutional change. To achieve this goal we propose an experimental design which is a modified version of the common bandit problem with finite time horizon (Gittins, 1979). The reasons for choosing a two-armed bandit experimental task are several. Firstly, this setting allows us to assess how people make reiterative choices, to check for their consistency over time. Moreover, small modifications allow us to control for the effect of social interactions and contextual mutations on individual behaviour. In fact, it has been acknowledged that people’s preferences are inconsistent and context-dependent (Shafir et al., 1993). Moreover, when choosing amongst alternatives, people do not analyse all options in detail but rather sequentially eliminate sub-sets of possibilities according to a hierarchical structure (Tversky and Sattath, 1979). Lastly, binary choices lie at the core of the two-armed bandit. Although Simon underlined the importance of binary choice experiments to test for example utility-maximising principles as already as 1959, to the best of our knowledge only very few experiments in economics have followed this prescription (Banks et al., 1997; McElreath et al., 2005; Gans et al., 2007).