ABSTRACT

In this chapter, a behavioral model of path dependency is developed that is grounded in behavioral economics. The persistence of inefficiency is given by the dominance over time of the suboptimal economic regime represented by a curve representing the initial and suboptimal economic regime. And what is clearly suggested by the David-Arthur paradigm is the likelihood of a free market dominated by such market failures in spite of the clear and manifest superiority of existing and known alternatives, such as represented by curve representing the optimal, least-cost economic regime. Under some circumstances, market failures can result that are consistent with the constrained utility maximization of rational optimizing economic agents, thereby reducing a society's level of material welfare from what it might otherwise be. In contrast, in the behavioral model of the path dependency, there is no unique wage, at least over a range of wage rates, that will yield a unique cost-minimizing level of effort.