ABSTRACT
This chapter focuses on a model of path dependency that is grounded in behavioral economics. In a world where x-inefficiency is both possible and probable and where productivity and working conditions/labor relations, as well as institutional and cultural parameters, are intimately related, inefficient or suboptimal economic outcomes might be the dominant long-run equilibrium outcome to particular economic problems. The David—Arthur configuration of path dependency theory assumes, along with conventional economic wisdom, that effort is not a discretionary variable and that the quantity and quality of effort per unit of labor input are maximized at any given time. Scholars arguing on either side of the path dependency debate agree that producing at a relatively low level, ceteris paribus, is indicative of a market failure, where the opportunity cost to society is the loss of output. Modeling the economic agent in terms of more realistic behavioral assumptions allows for the persistence of the inefficient economic regimes.
