Path dependency is an economic concept which posits that past decisions affect current behavior. As it relates to institutional development, the theorem states that present institutions retain vestiges of the institutions that preceded them. Essentially, path dependency focuses on analyzing the historical antecedents of institutions in order to explain the current state of an institution and to predict future behavior.
Douglass North employs path dependency to explain the historical divergence of English and Spanish economic and institutional development. North explains that in England the preceding institutional characteristics of feudalism anticipated a parliamentary system of government which negotiated with the monarchy to set rates of taxation. The dependency of the monarch in feudalism on property owners for revenue (or tribute), and in turn the land titling of the property owners, carried over into the parliamentary system. These historical precedents then persisted in the parliamentary system, leading to a political system with strong property rights based upon the rule of law. Spanish development was dictated by the centralized nature of the Crown of Castile and the alcaba tax regime. These institutions then influenced the nature of the Spanish state which engaged heavily in extracting revenue in order to pay sovereign debts. This led to a tradition of weak property rights, and thus reduced economic growth in the long term.
Path dependency has also been used by Acemoglu et al to explain the divergence of economic development in North and South America. During the initial stages of colonization, the colonizers created institutions that supported property rights or were extractive, depending on the habitability of the regions they were colonizing. They demonstrate that colonies with high malaria rates received institutions from the colonists that were extractive, whereas habitable colonies such as the English colonies received institutions with strong property rights. This then explains the divergence in development between North and South America.
The major criticism that is leveled at path dependency is that it is too deterministic.
- North, D. C. (2004). Institutions and Economic Growth: A Historical Introduction. In J. A. Frieden, &amp; D. A. Lake, International Political Economy: Perspectives on Global Power and Wealth (pp. 47-59). London: Routledge.
- Acemoglu, D., Johnson, S., &amp; Robinson, J. (2001). he Colonial Origins of Comparative Development: An Empirical Investigation. American Economic Review. , 1369-1401.