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The Economics of Bounded Rationality, Entrepreneurship and Institutional Evolution

Author

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  • Day, Richard H.

    (Research Institute of Industrial Economics (IFN))

Abstract

Bounded rationality provides a fundamental economic explanation for non-rational modes of behavior. These non-rational modes underlie both the erratic perturbations of entrepreneurship and the systematic waves of diffusion they initiate which in turn guarantee that the economy operates out of equilibrium. Continuing adjustments out of equilibrium are made possible by financial intermediation. They imply asymmetric changes in individual welfare. The markets for entrepreneurship, ownership and control that liberate creativity and boundedly rational decision-making, therefore, also lead inevitably to conflict among various social groups. Democratic mechanisms for correlating public and private interest that enlist the voluntary participation of agents who are sometimes made worse off in the continuing process of social transformation and which restore access to markets for those who lose is therefore an essential part of a modern economic system. The dialectical interaction among market al1ocations, non-market buffering and stabilizing institutions and democratic process is thus fundamental. Reforms that are based on this interaction achieve voluntary self-transformations. Those that do not, ultimately fall victim to involuntary forces.

Suggested Citation

  • Day, Richard H., 1989. "The Economics of Bounded Rationality, Entrepreneurship and Institutional Evolution," Working Paper Series 210, Research Institute of Industrial Economics.
  • Handle: RePEc:hhs:iuiwop:0210
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    File URL: http://www.ifn.se/wfiles/wp/wp210.pdf
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    References listed on IDEAS

    as
    1. Conlisk, John, 1980. "Costly optimizers versus cheap imitators," Journal of Economic Behavior & Organization, Elsevier, vol. 1(3), pages 275-293, September.
    2. Heiner, Ronald A., 1988. "Imperfect decisions in organizations : Toward a theory of internal structure," Journal of Economic Behavior & Organization, Elsevier, vol. 9(1), pages 25-44, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Entrepreneurship; bounded rationality; institutional evolution;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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