When Order Affects Performance: Institutional Sequencing, Cultural Sway, and Behavioral Path Dependence
Abstract: To understand how different rules, laws, and other institutions affect one another's performance, we propose a model of behavioral spillovers across institutions. Agents' initial reaction to an institution depends on their existing behavioral repertoires. We find that as spillovers increase in magnitude, path dependence becomes likely; however, when spillovers become large, the path becomes less important than the initial choice of institution. We use this model to characterize the optimal sequencing of institutions. We find that the best-performing sequences initially induce behavioral diversity and then build on existing productive behaviors to avoid inefficient spillovers. Counterintuitively, these sequences maximize potential for path dependence in order to avoid its realization. We also characterize conditions that make institutions less prone to interaction effects and find that optimal payoff structures rely on weak punishments.