A behavioral theory of governments’ ability to make credible commitments to firms: The case of the East Asian paradox

Abstract

An expansive literature exists linking institutional constraints, credible commitments, and economic growth. Yet, this literature runs into difficulty when it tries to explain the East Asian “paradox:” rapid economic growth achieved by countries with low levels of formal constraints on government discretion. We use a behavioral theory of commitment to argue that the characteristics of the salient actors (governments) and their actions (policies) affect the credibility of their behaviors in ways independent of the structural underpinnings of a country’s political institutions. This behavioral theory of commitment provides a distinct but complementary lens through which to view the apparent paradox presented by these East Asian countries, and more generally provides an alternative theoretical mechanism to explain and predict governments’ ability to credibly signal their commitment to a course of action to investing firms. The success of East Asian countries in encouraging investment from both domestic and foreign firms implies that firms interpret governments’ actions as credible signals of their intention to honor their commitments to firms, consistent with the behavioral theory of commitment.