Question

why can’t we assume that formal institutions are inherently better than informal ones?

How do formal and informal institutions complement each other?

Answer 1

Formal institutions are the written, rules, guidelines, regulations and or constitutions that are legally enforceable, but these institutions do not solve the problem of unethical practices as these practices come with the loopholes in formal institutions. Though, these ethical challenges are resolved on the basis of informal institutions such as customs, societal norms, cultural values and other non-written guidelines that are taken in high regard in the society. So, we need both types of institutions and it cannot be said that formal  institutions are better than the informal institutions.

Both of these institutions complement each other as it one system brings guidelines that are not covered by the another institution. For example, regulations bring legal guidelines, but it may not necessarily care for the environment or customers , but societal norms force entities to become ethical and set good example to the stakeholders. So, both types of institutions are important and complement each other.