Path dependence in economic theory and research

Ann Hartell ()

No 2013/03, SRE-Discussion Papers from WU Vienna University of Economics and Business

Abstract: This paper gives an overview of the concept of path dependence and explores its relevancy for sustainability-related research. The importance of path dependency for evolutionary economics is discussed, along with some important criticisms of the concept. The framework of path dependency is then applied to a case study of a regional rail transport plan with implications for sustainable transportation systems. Traditional economic theory emphasizes a set of assumed initial conditions, a series of decisions guided by rationality and perfect information which deliver a market to a state of predictable equilibrium where efficiency reigns. The orthodox idea of equilibrium holds that any and all pathways lead to a state of stability; in effect a market equilibrium outcome is predetermined and inescapable.Yet this approach leaves much unconsidered. It does not account for much of the dynamic behavior of markets and economies. It cannot explain why markets fail to efficiently allocate resources or select suboptimal technologies for widespread use. Or why policy interventions so often fail to shape market outcomes in predictable ways. For practitioners or researchers interested in applied questions such as how to foster innovation, how R&D investments can deliver greater economic returns, how to promote the diffusion of technological improvements, or how regions can align policies and programs to launch and sustain development, traditional analyses offer "thin" explanations. These voids suggest a need for alternative frameworks that better fit what is observed in actual economies, rather than theoretical ones (Simmie, 2012). This paper examines an alternative conceptual framework that addresses some of these gaps: Path dependence. The paper provides an overview of the concept of path dependence and an exploration of its relevancy for sustainability-related research. In structure, the first section is an introduction to path dependence and its relationship to evolutionary economics, followed by some important criticisms. The next section outlines how a path dependence approach has been used in studies of change in the transport sector. The final section offers a brief case study of a sustainable transport project from the path dependence perspective.

Date: 2013
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