Break-outs from Institutional Lock-ins, is It Possible at All?

Abstract: In analysing institutional change over time the concepts of path dependence and institutional lock-ins play an important role. Following North (1990), a number of factors and mechanisms causing institutional path dependence are discussed in the literature. Large set-up costs, increasing returns to scale, coordination effects, learning effects, adaptive expectations, but also legal paradigms and trajectories are the most important ones. Such institutional lock-ins may result in the prevalence of suboptimal institutions despite the existence of more efficient ones. In contrast to their importance the factors and mechanisms which may lead to a break-out from such institutional lock-ins have received only minor attention. In our paper we discuss the impact of better information, a decrease in set-up costs (including switching costs), learning effects and external shocks. We examine the effect of the often competitive relationship between the various agents who are engaged in activities to bring about institutional change (legislators, public administration, the courts). We assess our hypotheses with regard to the various factors that bring about break-outs from institutional lock-ins, using a case study on the German Bismarckian social security law. Introduced under a monarchy in the late 19th century, its main pillars are still in use in Germany today, despite several changes in the political system, a profound change in the economic environment and also in social relationships.