Mental Models, Decision-Making, Bargaining Power, and Institutional Change

Abstract

Institutions not only impact on the behavior of individuals, but they are affected by the behavior of individuals and the mental models or practical theories that drive human action. I argue that it is important to better incorporate mental models and competing mental models into the modelling of institutional change. This needs to be coupled with integrating the role of power relationships to better explain for institutional change and related to this, economic development. Power relationships affect not only the development of mental models, which ones are developed and articulated, they also influence which ones receive public approbation or disapprobation, and which are used to drive or justify institutional design and public policy. I argue that given the particular bundle of power relationships and mental models one can predict an array of institutional designs consistent with an array of levels of economic development and wellbeing, ranging from highly efficient and dynamic to inefficient and laggard. In contrast with traditional economics, no unique set of institutions are inevitable and efficient regimes need not and often do not drive out the inefficient ones. And, in contrast with transaction cost institutional modelling, transaction costs’ role is outranking here by the importance of bargaining power, mental model availability and model literacy.