COMPARING CENTRALIZED AND DECENTRALIZED INSTITUTIONS - A REPLY

Schwartz and Tomz (1997) have correctly pointed out an error in our 19 87 article: We had neglected to analyze how changes in group compositi on improve the performance of centralized institutions over time. The change affects only the case of perfect monitoring, however. We argue, moreover, that even in this special context, our main qualitative con clusion-that the centralized structure has no positive advantage over the decentralized one-continues to hold. We reach different conclusion s about the relative roles of the two institutions, partly because we had in mind a positive interpretation, whereas Schwartz and Tomz selec t a normative interpretation of the issue of institutional choice. Fin ally, we believe that imperfect monitoring is essential to the theory, in order to derive conclusions that are not driven by artifacts of th e model or by arbitrary equilibrium selections.