Towards a Theory of Induced Institutional Change: Power, Labor Markets, and Institutional Change
ALTERNATIVE INSTITUTIONAL STRUCTURES, Nicholas Mercuro, Sandra S. Batie (eds.), pp. 300-329, London: Routledge, 2008
Posted: 18 Jan 2010
Date Written: 2008
Institutional change has conventionally been very little modeled because of the implicit assumption that institutions adapt according to the efficiency needs of the economy. However most countries have a historic record of economic inefficiency which suggests that it would be useful to model institutional change as an induced phenomenon. In the model presented here institutions evolve in response to changes in the relative power of economic agents in the labor market. From examining this model it can be concluded that a competitive market is no guarantee of efficient institutional change, nor is the construction of pro-business property rights. Institutions under which the majority can not fulfill their preferences will tend to be more inefficient, while those which are more apt to protect labor and human rights, such as democratic institutions, tend to accommodate an economic environment conducive to higher rates of growth and economic efficiency. Societies can be expected to remain below the x-efficiency production possibility frontier unless a more complete set of institutional changes are introduced.
Keywords: Institutional change, Efficiency, Inefficiency, Labor market, Competitive market, Property rights, X-efficiency
JEL Classification: J45, D02
Suggested Citation: Suggested Citation