Organizational Path Dependence: The Prevalence Of Positive Feedback Economics In Hierarchical Organizations

Abstract

We focus on the application of path dependence logic in organizations, particularly on the role of self reinforcing mechanisms in the evolution of institutions in business firms. Path dependence theory suggests that self reinforcing mechanisms may lead to very high persistence of inefficient institutional solutions. The so called lock-in can create a growing threat to an organization’s viability. While path dependence theory is developed as a market based approach and widely accepted in economics, some critics doubt its application to organizations science. They argue that asymmetric power structures in organizations contradict with the basic assumptions of perfect markets and thereby models of path dependence cannot properly be applied to organizations. Attempts to incorporate asymmetric power structures to formal models of path dependence are difficult because they create process-oriented, complex models of interaction on different levels that become mathematically intractable. With the use of computer simulation, institutional change in organizations can be modeled as an interdependent multilevel-process and analyzed numerically. The results allow predictions of institutional long-term states of the system and the conditions, which result in a lock-in situation. By varying the magnitude of the complementary effects and organizational structure as the two independent variables, the institutional evolution in social systems prone to positive feedback can be examined. The results of this work in progress will add to both path dependence theory and the discussion about optimal organizational design.