A Behavioral Theory of the State
ALTERNATIVE THEORIES OF THE STATE, S. Pressman, ed., Palgrave Macmillan, pp. 164-190, 2006
Posted: 26 Jan 2010
Date Written: 2006
According to standard neoclassical theory, institutions do not matter for understanding the process of economic change or why economies operate inefficiently because institutions will evolve to enhance economic efficiency. In contrast, a behavioral approach lets institutions have a substantive impact on the economy because institutions determine the incentive structure within which economic agents make their choice, critically, the bargaining power of labor. It has been argued that efficiency-inducing institutions require private property rights that bring the private rate of return in line with the social rate of return. However this paper argues that this alone will not bring about efficiency and that efficient institutional change is dependent on allowing labor to increase its bargaining power. When bargaining power has been suppressed (such as in serfdom) only a small group yield benefits generating inefficient results. However enhancing the bargaining power of labor and then letting firms respond to higher labor costs, will promote efficiency and technological progress. Labor rights are also required for an economy to move towards its outer-most production possibility frontier. Labor rights can therefore be viewed as a component of a human rights bundle critical to democratic governance.
Keywords: Economic change, Efficiency, Incentive structure, Bargaining power, Labor rights, Governance
JEL Classification: D03, H70
Suggested Citation: Suggested Citation