Towards a Theory of Institutionally Embedded Preferences

Abstract

This paper develops a decision-theoretic formalization of how informal institutions affect economic decision-making. Standard behavioral and institutional models widely recognize that social institutions influence economic choice. However, they frequently represent this influence through a single analytical channel, typically modeling institutions either as preference shifters within the utility function or as exogenous constraints on choice. The contribution of this paper is not to introduce a new utility function, but to distinguish two ways institutions affect economic choice: (1) Informal institutions generate preference states, and (2) Informal institutions determine institutionally admissible actions. We formalize a minimal dual-mechanism architecture in which institutions generate agents' preference states while simultaneously determining the institutionally admissible action set. The agent then maximizes utility over this admissible set. The admissibility mechanism represents circumstances in which particular actions expose individuals to severe relational, reputational, or material consequences. Distinguishing these mechanisms allows identical observed behaviors to arise through either internalized valuation or institutionally enforced admissibility. Motivated by qualitative findings from highly collectivist contexts, this framework provides a parsimonious decision-theoretic architecture for representing informal institutions without modifying the underlying principles of rational choice.