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Journal oJEconomic Perspectives
10
2
Spring 1996
Pages 105-122
The Economics of Convention
H Peyton Young
Conventions regulate much of economic and social life, yet they have received surprisingly little attention from economists. By a convention, we mean a pattern of behavior that is customary, expected and self-enforcing.
Everyone conforms, everyone expects others to conform, and everyone has good reason to conform because conforming is in each person's best interest when everyone else plans to conform (Lewis, 1969). Familiar examples include following rules of the road, adhering to conventional codes of dress and using words with their conventional meanings.
elude species of money and credit, industrial and technological standards, account ing rules and forms of econotnic contracts. Indeed, it would scarcely be an exalt geration to say that almost all economic and social institutions are governed to some extent by convention.
The main feature of a convention is that, out of a host of conceivable choices, only one is actually used. This fact also explains why conventions are needed: they resolve problems of indeterminary in interactions that have multiple equilibria. Indeed, from a formal point of view, we may define a convention as an equilibrium that everyone expects in interactions that have more than one equilibrium.
The economic significance of conventions is that they reduce transaction costs. Imagine the inconvenience if, whenever two vehicles approached one another, the Impomant exceptions ara Sugden (1986) and Ullman-Mat alit (1977). The interested reader might also refer to the symposium on social norms that appeared in the Fall 1989 issue of this journal, with amides by Sugden (1989) and Elster (1989).
H. Peyton Young is Professor of Economics, ,johns Hopkins University, Baltimm Matvland.
drivers had to get out and negotiate which side of the road to take. Or consider the cost of having to switch freight from one type of railroad car to another whenever a journey involves both a wide-gauge and a narrow-gauge railroad line. This was a common circumstance in the nineteenth century and not unknown in the late twentieth: until recently, Australia had different rail gauges in the states of New South Wales and Victoria, forcing a mechanical switch for all trains bound between Sydney and Melbourne.
Conventions are also a notable feature of legal...