First, explicit modeling of the frequency with which the steering institutions adjust their actuating signals can be used to study inertia in institutional change, the cyclical patterns of such change and how they correspond to cyclical changes in output.
The crux though is that such feedback would hold more intrinsic information for the steering institutions.
The political rules (such as those embodied in a constitution), social customs and traditions, and the theoretical underpinnings of neoclassical economics upon which the steering institutions are based form an incomplete contract between the steering institutions and the actuators.
The steering institutions generate a set of reference variables ((w_{t})) that can be interpreted broadly as the objectives over a set of variables that the social, economic and political steering institutions interactively and collectively define for society.
They indirectly impact the manner in which the steering institutions set reference variables by a process of conveying subjective information to the steering institutions on the impact of development (output) on society.
In our context, we can interpret (mathbb {P}) as the sensitivity of the steering institutions' response to a given error.
In a situation where (hat{w}ne w_{t},) the steering institutions may interpret this feedback in two ways.
The steering institutions seek to control the behavior of the social process, or plant, which produces the output.
Third, smart institutions are capable of incorporating fuzzy or qualitative feedback and quantifying it for their steering institutions.
Section 2 identifies the main elements of smart institutions: steering institutions that generate low-powered signals, actuators that transform these to high-powered ones, output that is produced by the actions of the steering institutions and actuators within a social process, and a social feedback mechanism that influences the steering institutions' choice over reference variables.
The term (gamma _{t}) is a shock parameter that captures any external influence on the setting of the reference variables by steering institutions.
