Inclusive institutions and path dependence: Evidence from an underdeveloped region in India

Abstract

Recent literature on evolution of economies proposes that nations can turnaround their development trajectory by adopting inclusive institutions. This proposition assumes that inclusive institutional innovation creates positive feedback for the economy. Using narrative analysis and econometric modeling, we test a set of hypotheses linking path dependence, institutional change and economic performance for explaining feedback in the context of transfer of an inclusive institutional innovation to an underdeveloped region in India. We find that despite adoption of inclusive institutional innovation in an under-developed region, the mental model of economic actors and their behavior are still locked-in with the prior institutional norms, that such lock-ins sustains an incentive structure that negatively reinforce sustenance of benefits created through adoption of inclusive institutional change, and that sustenance of benefits from inclusive institutional innovation is better when adaptive efforts follows such institutional change.