The difference between informal and formal constraints is one of degree. Envision a continuum from taboos, customs, and traditions at one end to written constitutions at the other. The move, lengthy and uneven, from unwritten traditions and customs to written laws has been unidirectional as we have moved from less to more complex societies and is clearly related to the increasing specialization and division of labor associated with more complex societies.

The increasing complexity of societies would naturally raise the rate of return to the formalization of constraints (which became possible with the development of writing), and technological change tended to lower measurement costs and encourage precise, standardized weights and measures. The creation of formal legal systems to handle more complex disputes entails formal rules; hierarchies that evolve with more complex organization entail formal structures to specify principal/agent relationships. The general characteristics of the shift from status to contract have been amply discussed, but it is worth emphasizing the following.

Formal rules can complement and increase the effectiveness of informal constraints. They may lower information, monitoring, and enforcement costs and hence make informal constraints possible solutions to more complex exchange (see Milgrom, North, and Weingast, 1990, and Chapter 7 for elaboration). Formal rules also may be enacted to modify, revise, or replace informal constraints.