Lock-in institutions and efficiency

Economists who emphasize path dependence generally dispute, at first approximation, the effectiveness of rational choice in understanding institutions. Such economists, belonging to the original (old) institutional economics and the historical school maintain that the constraint function is riddled with inefficient technologies and institutions which agents fail to replace with superior ones even when the switching cost is clearly lower than expected benefit. The argument ultimately rests on a theory of action á la Herbert Simon—where agents become habituated for whatever is the default institution. Such a theory recognizes that agents are ready to replace habits with more viable ones—but only when agents face shocks or crises. Such recognition, though, necessarily allows rational choice, in the sense of responsiveness to incentives, to enter from the rear window: after all, shocks and crises are merely severe incentives. © 2011 Elsevier B.V. All rights reserved.