Institutional Change and the Uses and Limits of Path Dependence: The Case of German Finance

Abstract

How can we determine when an existing institutional path or trajectory is ending and being replaced with a new one? How does such a process take place? How can we distinguish between institutional innovation within an existing trajectory and a switchover to a new trajectory or path? This paper explores these questions by examining the pattern of institutional change in the German financial system. It is argued that this system has moved onto a new institutional path. In the course of analyzing this case, the paper advances four theoretical claims: First, that endogenous developments can disrupt an institutional path and lead to a new one. Second, that an event sequence involving a move to a new institutional path may not follow from a contingent event yet may nonetheless be marked by path dependent or increasing returns processes. Third, that increasing returns in politics are not automatic and must be cultivated by actors in order to be realized. Finally, that the concept of path is still in need of a measurable conceptualization before any further advances in path dependent arguments can be made.

Keywords: path dependence, institutions, finance, Germany

JEL Classification: G20, L20, P12, P51