Toward a New Theory of Institutional Change

Kurt Weyland

World Politics, Volume 60, Number 2, January 2008, pp. 281-314 (Article)

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TOWARD A NEW THEORY OF INSTITUTIONAL CHANGE

By KURT WEYLAND*

THERE has been a great disjuncture between political science and political reality in the last two decades. Whereas many political

scientists have embraced institutionalism, highlighting the stability and persistence of political patterns and stressing the inertial forces in institutional change, the political world has simultaneously expe-rienced waves of profound transformation and stunning changes of trajectory—the advance of democracy, the fall of communism, and the adoption of market reforms in large numbers of countries. Few if any of these striking departures were foreseen by political science.1 This weak record suggests the need to rethink institutionalist approaches, whose static and linear assumptions make it difficult to account for profound political change.

The revival of institutionalism has certainly spawned a host of fruit-ful efforts to analyze the creation, maintenance, and change of institu-tions, a growing interest that has produced many important scholarly contributions. But institutionalism also suffers from significant limita-tions. While coming in different versions,2 it derives primarily from static and linear premises. Institutionalism has emphasized inertia and persistence and conceptualized institutional change as a more or less steady path along a predefined trajectory. To the extent that institu-tions matter, they by their nature exert stickiness and guarantee some

* I thank Isabela Mares for suggesting that I generalize from my earlier work and write this article. I am grateful to Catherine Boone, Kenneth Greene, Wendy Hunter, William Hurst, Patricia Mac- Lachlan, Rose McDermott, Raúl Madrid, and three anonymous reviewers for excellent comments on earlier versions, and to the Lozano Long Institute of Latin American Studies at the University of Texas at Austin for its continuing support for my research.

1 Even a very astute, perceptive institutionalist such as Samuel Huntington believed in 1984, im-mediately before the fall of communism, that “the likelihood of democratic development in Eastern Europe is virtually nil”; Huntington, “Will More Countries Become Democratic?” Political Science Quarterly 99 (Summer 1984), 217. On the low success rate of expert predictions, see the thorough analysis by Philip Tetlock, Expert Political Judgment (Princeton: Princeton University Press, 2005).

2 Peter Hall and Rosemary Taylor, “Political Science and the Three New Institutionalisms,” Politi-cal Studies 44 (December 1996); Ira Katznelson and Barry Weingast, eds., Preferences and Situations (New York: Russell Sage Foundation, 2005).

World Politics 60 ( January 2008), 281–314

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3 Paul Pierson, Politics in Time (Princeton: Princeton University Press, 2004); James Mahoney, “Path Dependence in Historical Sociology,” Theory and Society 29 (August 2000); see also Douglass North, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990), chaps. 10–11.

4 Taylor Boas proposes a more flexible version of path dependence to account for gradual change and its cumulation over time, but his theory does not foresee or explain drastic, trajectory-inflecting change; Boas, “Conceptualizing Continuity and Change,” Journal of Theoretical Politics 19 ( January 2007).

5 Stephen Krasner, “Approaches to the State,” Comparative Politics 16 ( January 1984).6 E.g., Robert Bates, Avner Greif, Margaret Levi, Jean-Laurent Rosenthal, and Barry Weingast,

Analytic Narratives (Princeton: Princeton University Press, 1998).7 Robert Bates, Markets and States in Tropical Africa (Berkeley: University of California Press,

1981); Barry Ames, Political Survival (Berkeley: University of California Press, 1987).

degree of stability; they endure in the constant flux of political life and give it order and structure. Institutions also condition political change, including their own transformation, by empowering the beneficiaries of established arrangements, creating obstacles for challengers, and limit-ing the options for innovation.

These static and linear assumptions inform specific institutionalist arguments. Historical institutionalism expects path dependency: “in-creasing returns” and other stabilizing mechanisms keep institutions on long-standing trajectories.3 Once an institutional arrangement achieves consolidation, it is expected to persist, barring external shocks. Due to this assumption of institutional self-perpetuation, no theory of decon-solidation has even been developed.4 Drastic change is viewed as rare and the result of exogenous irruptions that break institutional conti-nuity in a pattern of “punctuated equilibrium.”5 The origins of these infrequent transformations are thought to lie outside the confines of institutionalist theories.

Though starting from different premises, rational choice institu-tionalism yields similarly static and linear predictions. It conceptualizes institutional arrangements as equilibria from which no relevant actor has an incentive to diverge.6 Absent exogenous changes in parameters, it, too, postulates institutional persistence. In fact, actors have great difficulty escaping from dysfunctional equilibria, that is, deterioration and decline. Powerful sociopolitical forces that individually benefit from problems that afflict society stubbornly defend their ill-gotten gains; and pervasive collective action problems prevent the many, but individually powerless losers from challenging the problematic institu-tional arrangement and forcing improvements.7 The compelling logic of this explanation of decay makes it exceedingly difficult to account for change for the better where it does occur.

But such profound, qualitative change has in fact occurred in a num-ber of countries, such as Bolivia, Peru, Ghana, and Uganda in the 1980s

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8 Merilee Grindle, “The New Political Economy,” in Gerald Meier, ed., Politics and Policy Mak-ing in Developing Countries (San Francisco: Institute for Contemporary Studies Press, 1991); James Malloy, “Democracy, Economic Crisis, and the Problem of Governance,” Studies in Comparative Inter-national Development 26 (Summer 1991); Jeffrey Herbst, The Politics of Reform in Ghana, 1982–1991 (Berkeley: University of California Press, 1993); Kurt Weyland, The Politics of Market Reform in Fragile Democracies (Princeton: Princeton University Press, 2002).

9 Samuel Huntington, The Third Wave (Norman: University of Oklahoma Press, 1991); John Markoff, Waves of Democracy (Thousand Oaks, Calif.: Pine Forge Press, 1996); Charles Kurzman, “Waves of Democratization,” Studies in Comparative International Development 33 (Spring 1998).

10 Thelen, “Historical Institutionalism in Comparative Politics,” Annual Review of Political Science 2 (1999); Thelen, How Institutions Evolve (Cambridge: Cambridge University Press, 2004); and John Campbell, Institutional Change and Globalization (Princeton: Princeton University Press, 2004).

11 Greif and Laitin, “A Theory of Endogenous Institutional Change,” American Political Science Review 98 (November 2004).

and 1990s.8 These nations suffered through many years of worsening problems that threatened the functioning and even the survival of such basic institutions as the state. Yet precisely when the crisis seemed hopeless, determined rescue efforts turned their fate around, restored some state capacity, and started institutional rebuilding. What accounts for these surprising inflections in institutional trajectories? And what explains other forms of profound change, such as the fall of commu-nism and the adoption of democracy even in countries that seemed to lack the necessary prerequisites?

Moreover, these dramatic institutional changes have often come in waves. As one country has charted a striking new course, many oth-ers have sooner or later followed the frontrunner. Demonstration and contagion effects have proved powerful. As a result, new institutional departures have often clustered. The Chilean model of market reform found imitators throughout Latin America, for example, and democ-ratization has spread in regional and global waves.9 Thus, institutional change has proved surprisingly discontinuous, both in diachronic and cross-sectional terms. With their essentially exclusive focus on domes-tic factors, institutionalist arguments of all stripes have largely over-looked this prevalence of waves.

Confronted with the unexpected frequency and magnitude of change, institutionalist scholars have recently begun to move beyond the static, linear assumptions underlying their framework. Some historical insti-tutionalists, especially Kathleen Thelen,10 have sought to soften the de-terministic logic of path dependency and have pointed to the constant adaptation and modification of established institutional arrangements. And from the rational choice institutionalist camp, Avner Greif and David Laitin have stressed that institutional equilibria can have longer-term effects that reinforce or undermine these arrangements.11 These first steps toward a more dynamic view of political institutions open the

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door for explaining surprising twists and turns in the fate of polities. But these arguments merely outline conceptual possibilities. Greif and Laitin, for example, do not develop a substantive account of the condi-tions under which institutions reinforce or undermine themselves. And Thelen analyzes limited adaptations and gradual adjustments rather than the trajectory changes and actual reversals of fortune that have in fact occurred in many countries, with tremendous repercussions for their future development. Much theorizing therefore remains to be done. In particular, the frequent waves of change have received highly insufficient attention.

The present article is an effort at theory building. It starts from a novel foundation, namely, cognitive-psychological findings about bounded rationality.12 By integrating specific applications of such find-ings to political science issues13 into a broad, synthetic framework and by extending the work of Bryan Jones and Frank Baumgartner,14 the article seeks to elucidate both the demand side and the supply side of institutional change. It first shows why political actors may allow problems to worsen for a while, but why this deterioration eventually triggers determined efforts to turn the situation around. Besides the perceived need for change, however, the availability of a viable solution is also required. Subsequent sections of the article therefore analyze how political actors design reform proposals and highlight the frequen-cy with which inspiration comes from foreign ideas and models. This analysis helps us to account for the prevalence of waves of institutional change. These sections propose the core of a new theory, though one that will need further development and elaboration, as is discussed in the conclusion. While space constraints preclude systematic empirical assessments of this new framework, the second half of the article offers brief illustrative applications to the transformation of economic, social, and political institutions.

12 On the differences between these cognitive-psychological findings and the older literature on bounded rationality spawned by Herbert Simon, see Jonathan Bendor, “Herbert A. Simon: Political Scientist,” Annual Review of Political Science 6 (2003).

13 Jeffrey Berejikian, “Revolutionary Collective Action and the Agent-Structure Problem,” Ameri-can Political Science Review 86 (September 1992); Maria Fanis, “Collective Action Meets Prospect Theory,” Political Psychology 25 ( June 2004); Rose McDermott, Political Psychology in International Relations (Ann Arbor: University of Michigan Press, 2004); Barbara Vis, “Biting the Bullet or Steering Clear?” (Ph.D. diss., Vrije Universiteit Amsterdam, 2007); and especially Weyland (fn. 8); and idem, Bounded Rationality and Policy Diffusion (Princeton: Princeton University Press, 2007).

14 Bryan Jones and Frank Baumgartner have also applied bounded rationality to political decision making and rigorously documented the patterns of institutional change highlighted in this article. See Jones, Politics and the Architecture of Choice (Chicago: University of Chicago Press, 2001); and Jones and Baumgartner, The Politics of Attention (Chicago: University of Chicago Press, 2005). I comple-ment their work by proposing a more distinctive microfoundation and by stressing the supply side of institutional change, that is, the diffusion of models and ideas.

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the demand side of institutional change

Political science used to have a prominent framework that claimed to account for drastic, trajectory-inflecting change—namely, functional-ism. This holistic approach conceptualized polities as interdependent systems, with each part contributing to the maintenance and proper functioning of the whole. If stress or strain hindered this intrasystemic cooperation and produced worsening problems, the system would sooner or later adjust and reequilibrate to ensure its continued smooth operation.15 As challenges were bound to trigger responses, problems would find resolution.16 Thus, polities would not remain stuck in dys-functional equilibria, as later rational choice models predicted.17 In-stead, deterioration would prompt efforts at improvement—efforts to design reforms that would turn the system around and change its developmental trajectory. Functionalism thus offered an explanation of qualitative change, whereas contemporary political science lacks an explanation for it.

Functionalism, however, drew withering, convincing criticism for its sanguine insinuation that a crisis automatically triggers reform. More-over, it failed to specify the causal agent and mechanism that suppos-edly produces this positive outcome. Advocates of rational choice, in particular, attacked functionalism with their insistent demand for mi-crofoundations. From their methodologically individualistic starting point, invoking “the system” as a quasi actor that produces change is nonsensical; rather, only individuals are political actors—and individuals do not necessarily care about the system’s survival needs. Therefore, most political scientists have discarded functionalism. The present article cer-tainly does not propose reviving this problematic approach either.

Interestingly, however, cognitive-psychological findings offer a novel microfoundation for crisis arguments that can explain discontinuous change and striking turnarounds while avoiding the theoretical weak-nesses and moderating the excessive claims of functionalism. This new microfoundation has the advantage of resting on a wealth of well-cor-roborated empirical findings about human decision making. By con-trast, rational choice, the approach that is so insistent on the need for a microfoundation, derives its models from ideal-typical postulates about

15 Chalmers Johnson, Revolutionary Change (Stanford, Calif.: Stanford University Press, 1982).16 Pierre van den Berghe, “Dialectic and Functionalism,” American Sociological Review 28 (October

1963), 696–98; David Easton, A Systems Analysis of Political Life (Chicago: University of Chicago Press, 1979), 68–69, 366–76; see also Alexander Gerschenkron, Economic Backwardness in Historical Perspective (Cambridge: Harvard University Press, 1962), 5–30.

17 E.g., Bates (fn. 7).

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comprehensive rationality that lack realism18 and that are systematical-ly falsified in psychological studies.19 As experiment after experiment demonstrates, people simply lack the unlimited capacity for computa-tion and the cost-free access to information that fully rational deci-sion making would require. As cognitive science shows and as increasing numbers of political scientists recognize, human rationality is distinctly bounded.20 Insights on bounded rationality therefore offer a much firmer microfoundation for political science than do the stylized postulates of economic rationality that underlie conventional rational choice models.

Bounded rationality provides an individual-level base for predict-ing that ongoing deterioration eventually triggers efforts at reform and improvement. According to a core finding of prospect theory,21 people who face prospects of losses go to great lengths to avoid any costs, even if the chosen remedy holds considerable danger. They are willing to in-cur great risk—including the danger of further deterioration—to avoid any losses at all. This counterintuitive finding of risk acceptance in the domain of losses can sustain a nonlinear theory of change that accounts for turnarounds in political fate.

Specifically, cognitive psychologists consistently find that people who face the prospect of loss tend to take bold, drastic, and risky counter-measures. In these dire situations, people refuse to accept a sure loss of limited magnitude and instead prefer a gamble that holds the uncertain promise of avoiding any loss but also carries the risk of a really large loss. Even if this “lottery” has lower expected value than the first option of “cutting one’s losses,” the urge to avoid any costs induces most people to choose the gamble. Strong loss aversion makes them run risks. In the desperate hope of avoiding any costs, they bet on options that entail the danger of even greater deterioration. By incurring this risk, which gives their gamble lower expected value than the cautious acceptance of a certain but limited loss, they diverge from conventional expected utility calculations.22 But if they are lucky and manage to avert any losses, then a challenge in fact produced a beneficial response—just as functionalism predicted. If they are not lucky, however, the rescue effort can fail and even entail further deterioration. Cognitive psychology thus suggests

18 Daniel McFadden, “Rationality for Economists?” Journal of Risk and Uncertainty 19, no. 1–3 (1999); Richard Thaler, “From Homo Economicus to Homo Sapiens,” Journal of Economic Perspectives 14 (Winter 2000); contra George Tsebelis, Nested Games (Berkeley: University of California Press, 1990), 32–38.

19 Daniel Kahneman and Amos Tversky, eds., Choices, Values, and Frames (Cambridge: Cambridge University Press, 2000).

20 Jones (fn. 14); Bendor (fn. 12)21 Kahneman and Tversky (fn. 19).22 Ibid.

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that functionalism was too optimistic in expecting crises to generate their own solution automatically. In fact, drastic reform designed to address problems is highly risky: while it may produce a stunning turn-around, it may also aggravate the situation.

Thus, risk seeking in the domain of losses can explain drastic rescue efforts mounted by political actors seeking to stem political decay and restore basic institutional functioning. It provides an individual-level microfoundation for discontinuous political and institutional change. It thus recovers one of the central insights of functionalism, namely, that a worsening crisis can trigger an effort at reform. Contrary to function-alism’s optimistic premise, however, this effort may well fail because it entails a great deal of risk. Therefore, while crises can trigger turn-arounds, they can also advance deterioration.

By contrast, while risk acceptance prevails in the domain of losses, risk aversion holds sway in the domain of gains. When facing positive prospects, people tend to proceed with caution. They pursue gains with prudence and, due to loss aversion, refuse to incur risks for this purpose. In experimental settings, most people therefore prefer a sure gain of limited magnitude over a lottery that offers greater expected value by promising the possibility of a really large benefit while also holding out the risk of yielding no gain at all. This excessive caution again diverges from conventional expected utility calculations.

Caution prevails as well in mixed domains offering options that em-body both benefits and costs.23 Since these situations are particularly common in the real world, change is likely to be asymmetrical: many minor adjustments are occasionally punctuated by a major restructur-ing. Caution usually prevails and inspires limited efforts at improve-ment; the response is considerably weaker than the challenge. Because of this reform deficit, problems tend to accumulate over time and cre-ate increasing difficulties. Only when these problems reach crisis levels will decision makers adopt determined countermeasures. In fact, under such dire circumstances—that is, when they face a domain of losses—they tend to overshoot and adopt strikingly risky measures.24

Thus, change is disproportionate in both directions. For a long time decision makers do less than a rational assessment of the situa-tion calls for and instead try to muddle through; but when problems get out of hand, they finally confront the ongoing deterioration, act with full force, and effect a breakthrough. This lengthy hesitation and

23 Paul Schoemaker, “Are Risk-Attitudes Related across Domains and Response Modes?” Manage-ment Science 36 (December 1990).

24 Fanis (fn. 13); Vis (fn. 13).

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eventual boldness gives rise to the “punctuated equilibria” that scholars have observed.25 It accounts for the “leptokurtic” pattern of change that Jones and Baumgartner document empirically:26 diverging from the normal, bell-shaped distribution, the curve mapping the frequency and magnitude of change “has a higher than expected central peak, weaker ‘shoulders,’ or number of moderate changes, and a great many more outliers than would be present in a normal curve of similar variance.” This skewed distribution arises because there are many minor altera-tions, comparatively few medium-size changes, and a disproportionate number of major breakthroughs.

The distributional consequences of many institutional changes fur-ther sustain the frequent predominance of stasis. The usually power-ful sectors that benefit from the established arrangements fear that a transformation will impose losses on them. Since according to cogni-tive psychology, losses weigh far more heavily than gains, these sectors undertake disproportional efforts to defend the status quo. By con-trast, sectors that can expect to win from a significant change pursue these gains with much less zeal. Adopting risk aversion, they tend not to push that hard. The asymmetrical valuation of losses versus gains thus strengthens the power of inertia in institutional trajectories. Only serious problems that limit the circle of beneficiaries from the status quo and augment the range of current losers can invert this unfavor-able balance. When a crisis looms, the aggregate benefits arising from a transformation can finally outweigh the disproportionate concern about losses held by the defenders of the existing system.27 Thus, power and interests—central categories in political science—clearly affect the likelihood of institutional change, but crisis-induced shifts in risk pro-pensity affect the very constellation of power and interests.

In sum, distributional issues and power constellations make institu-tional change less likely than the individual-level findings of cognitive psychology might suggest. Aggregated to the level of collective decision making, risk seeking in the domain of losses and risk aversion in the domain of gains can account for the long stretches of continuity and occasional turnarounds that researchers have found.28 Thus, change is not proportional to the magnitude of problems. For a long time, there

25 Krasner (fn. 5).26 Jones and Baumgartner (fn. 14), 111.27 Although Dani Rodrik, who designs a prominent model along these lines, bases his argument

on the postulates of comprehensive rationality, he implicitly invokes the asymmetry of losses versus gains that cognitive psychology has demonstrated; otherwise, aggregate gains could compensate for distributional losses; Rodrik, “The Rush to Free Trade in the Developing World,” in Stephan Haggard and Steven Webb, eds., Voting for Reform (New York: Oxford University Press, 1994).

28 Jones and Baumgartner (fn. 14).

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is too little adjustment too late; but when the difficulties end up reach-ing crisis proportions, a dramatic breakthrough can occur.

Contrary to the optimistic assumptions of functionalism, however, such a transformation need not be for the better. Because of risk seeking in the domain of losses, rescue efforts may well fail and further exacerbate the situation. New rounds of change, undertaken with increasing desperation, may eventually bring relief. Many Latin American countries followed this pattern of worsening crisis, unsuccessful reform efforts, further deteriora-tion, yet eventual turnaround in the lengthy stop-and-go process of eco-nomic stabilization and market reform during the 1980s and 1990s.29

the supply side of drastic change

The preceding section has analyzed the demand side of institutional change while taking as a given the availability of various decision op-tions. But whereas the subjects of cognitive-psychological experiments choose among predefined alternatives, decision options are in no way “given” in the real world of politics. Instead, designing viable courses of action is one of the main tasks of political leaders and their advisers.

Specifically, risk seeking in the domain of losses prevails where there is an option that promises to avoid any losses—even at considerable risk. But it is far from unproblematic that actors have such an option. Con-trary to functionalist assumptions, problems do not bring forth their own solutions. It is often difficult to design a realistic, viable plan for addressing a difficulty. While problems may cry out for solutions, the appearance of a reasonable option is conditioned by ideational factors. Can actors design a plan that addresses urgent problems and outlines significant improvements while respecting prevailing parameters and constraints? A feasible program cannot be utopian but must be realistic and doable; yet it also needs to go beyond muddling through to outline a substantial transformation that can turn the situation around.

Designing such a program is anything but easy. Relevant political actors may be aware of problems, yet promising solutions do not appear automatically. There may be widespread agreement that something needs to be done—but what? Policy expertise and technical capacity, besides sheer creativity, are necessary ingredients for significant institutional change as well. Problems stimulate the demand for reform but change occurs only if there is also a supply of promising and feasible proposals.

Attention to the supply side of institutional change constitutes another crucial divergence of the present theory from functionalism,

29 Weyland (fn. 8).

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which concentrated on the demand side alone. Functionalism postu-lated that challenges bring forth an appropriate, beneficial response—in some sense, that is, problems produce their own solution. But in an increasingly complex and rapidly changing world, designing proper so-lutions is very difficult; many problems go unresolved not for a lack of political will but for lack of technically and politically feasible recipes.

Given the difficulty of producing viable programs, policymakers are receptive to external inputs and eager to learn from foreign models and experiences. They pay attention to innovations adopted by other nations, especially neighboring or culturally similar countries. Nowa-days, international organizations such as the World Bank also serve as “teachers.” Throughout history, leaders have commonly learned from the trials and errors of other polities. The absolutism of the Sun King, Louis XIV, inspired imitation by many European princes; the French Revolution of 1848 triggered violent contention throughout Central and Eastern Europe; and Bismarck’s social-protection scheme influ-enced similar reforms in Britain and Sweden.30

Thus, decision makers often do not design solutions to problems in an autochthonous fashion but rather find inspiration in foreign models and experiences. Drastic change in one country often prompts emula-tion efforts in other nations by calling attention to problems and of-fering ideas for solutions. This supply factor has the capacity to trigger change, and since this impetus can affect an entire region, reforms fre-quently advance in waves. Thus, there is diffusion: reform in one coun-try increases the probability of change in other countries. Such waves have characterized democratic transitions as well as military coups.31 Similarly, both the spread of state-interventionist economic national-ism from the 1930s to the 1960s and of neoliberalism in the 1980s and 1990s displayed significant contagion effects.

explaining waves of institutional change

Statistical studies that control for relevant domestic conditions have demonstrated the strength of these contagion effects.32 But the causal

30 Dieter Dowe, Heinz-Gerhard Haupt, Dieter Langewiesche, and Jonathan Sperber, eds., Europe in 1848 (New York: Berghahn, 2001); Hugh Heclo, Modern Social Policies in Britain and Sweden (New Haven: Yale University Press, 1974).

31 Huntington (fn. 9); Markoff (fn. 9); Kurzman (fn. 9); Richard Li and William Thompson, “The ‘Coup Contagion’ Hypothesis,” Journal of Conflict Resolution 19 (March 1975).

32 Daniel Brinks and Michael Coppedge, “Diffusion Is No Illusion,” Comparative Political Studies 39 (May 2006); Kristian Gleditsch and Michael Ward, “Diffusion and the International Context of Democratization,” International Organization 60 (Fall 2006).

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mechanisms that drive the spread of institutional and policy innova-tions have been the object of only limited scholarly attention. Inter-estingly, bounded rationality provides a microfoundation for diffusion processes and the role of supply factors in institutional change.

Psychological experiments and field studies find that decision makers proceed with bounded, not comprehensive, rationality. Given clear cog-nitive limitations and high computational costs, they do not proactively search for information and interpret and evaluate it in a systematic and balanced fashion, as the ideal-typical postulates of rational choice as-sume. Instead, they apply shortcuts that facilitate information process-ing but that can also distort inferences and judgments in significant ways.33 When confronting problems, therefore, decision makers have difficulty designing their own solutions from scratch because they re-quire such great computational effort. Decision makers prefer instead to learn from foreign experiences and import readily available exter-nal models. Bounded rationality explains why the supply of promising proposals often has foreign, not domestic, origins and why solutions to problems frequently derive from emulation rather than from innovation.

This learning from foreign experiences itself is shaped by bounded rationality. As policy analyses show,34 decision makers cannot meet the demanding standards of comprehensive rationality in assessing the value and promise of foreign innovations. Expertise is often limited and time pressure for making decisions is great, for instance, because of the electoral calendar. Therefore, decision makers cannot gather and process the relevant information thoroughly and systematically. If they want to “make a difference,” they need to grab whatever information happens to be available and quickly draw up a reform proposal.

For this purpose, decision makers apply two inferential shortcuts documented by cognitive psychology—the heuristic of availability and the heuristic of representativeness.35 The availability heuristic shapes memory recall and, as its basis, the allocation of attention. Experiments find that drastic, vivid information makes a disproportionate impres-sion on people and has a much greater impact on their perceptions and judgments than information that is of equal objective importance but

33 Daniel Kahneman, Paul Slovic, and Amos Tversky, eds., Judgment under Uncertainty (Cam-bridge: Cambridge University Press, 1982); Thomas Gilovich, Dale Griffin, and Daniel Kahneman, eds., Heuristics and Biases (Cambridge: Cambridge University Press, 2002).

34 Karen Mossberger and Harold Wolman, “Policy Transfer as a Form of Prospective Evaluation,” Public Administration Review 63 ( July 2003), 431–32, 436; Edward Page and J. Mark-Lawson, “Cross-National Policy Learning” (Manuscript, London School of Economics, 2007); Jones and Baumgartner (fn. 14).

35 Rajeev Gowda and Jeffrey Fox, eds., Judgments, Decisions, and Public Policy (Cambridge: Cam-bridge University Press, 2002); McDermott (fn. 13); Weyland (fn. 13).

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lacks the same immediacy and directness. Consider a common example: people overestimate the risk of plane accidents, which are dramatic but rare, and underrate the danger of car crashes, which are normal, daily occurrences—but which kill many more people. Cognitive availability skews judgments and prompts nonrational choices, such as people’s de-cision after 9/11 to travel by car rather than plane.

Applying this heuristic, hard-pressed policymakers act on the in-formation that is most “available” to them, rather than conducting a comprehensive search for the relevant materials. Their radar screen is limited by geographical, cultural, and temporal boundaries. Innovations adopted in their neighborhood have special immediacy and impact and attract much more attention than equally important changes occur-ring halfway around the globe. While territorial proximity usually af-fects availability, cultural similarities can extend decision makers’ atten-tion beyond their neighborhood, for instance, among the Anglophone countries. Timing also shapes attention. Recent changes are far more likely to be on the minds of decision makers than are reform efforts undertaken many years earlier. As memory is short, current informa-tion is most available.

When knowledge of new foreign experiments and models becomes available, decision makers evaluate the quality of these blueprints and estimate the benefits and costs that their emulation would likely entail. These assessments also deviate from comprehensive rationality.36 In-stead of relying on thorough, balanced cost-benefit analyses, decision makers commonly follow the heuristic of representativeness in allowing appearances of similarity to influence—and distort—their judgments. They draw excessively firm conclusions from small samples and short time frames, assuming that the initial stretch of experience is represen-tative of long-term performance. By jumping to this conclusion, deci-sion makers overlook the role of chance factors that can boost or de-press initial performance yet cancel out in the medium and long term. Due to the representativeness heuristic, a stretch of success inspires great enthusiasm for a foreign model.37

By attributing to initially successful innovations the halo of inher-ent excellence, the representativeness heuristic stimulates waves of emulation. As soon as a new policy attains some positive “notoriety,” policymakers in other countries rush to import it, assuming that it will

36 Mossberger and Wolman (fn. 34); see also Graeme Boushey, Diffusion Dynamics (Ph.D. diss., University of Washington, 2007), 28, 34, 36. Craig Volden paints a more rational picture by stressing the role of policy success as a stimulus for diffusion but does not find a very strong effect; Volden, “States as Policy Laboratories,” American Journal of Political Science 50 (April 2006), 302, 307.

37 Weyland (fn. 13), 49–50, 108–17.

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work on their own turf to resolve problems they had previously failed to overcome. The representativeness heuristic thus helps account for the S-shaped curve that characterizes the unfolding of diffusion:38 in-novations initially spread slowly, as decision makers take some time to assess their promise. Yet once there are indications of initial suc-cess, this cognitive shortcut inspires enthusiasm and triggers an up-surge of emulation. Over time, however, evidence of the import’s actual performance accumulates: it ends up being quite mixed and deflates the excitement stimulated by the representativeness heuristic. As deci-sion makers lower their expectations, the impulse for further diffusion weakens and the model’s spread tapers off. The cumulative frequency of change therefore describes an S-shaped curve.

By highlighting certain external innovations but not others and by shaping actors’ assessments of their benefits, cognitive heuristics can af-fect the constellation of interests and power. Inferences about a model’s success energize sectors that value the respective dimension and make it harder for opponents who stress other goals to offer resistance. An out-standing, particularly “available” model also turns into a rallying point for supporters, whereas opponents may have more difficulty organizing for collective action. Boundedly rational learning can thus shape the balance of influence and affect contending sectors’ mobilization of their power capabilities.

In these ways, cognitive psychology helps explain why substantial institutional change often proceeds in waves. As learning from foreign ideas and models supplies solutions to problems faced by domestic pol-icymakers, there are significant contagion effects. Institutional change does not happen independently in each country but often has a strong external stimulus.

the interaction of supply and demand in institutional change

As the preceding section shows, the external supply of a new model or idea can boost the likelihood of substantial institutional reform. Indeed, the adoption of an innovation in a neighboring country often calls at-tention to domestic issues that, amid the flood of problems confronting policymakers, had not been seen as pressing before. Thus, the external supply of a solution can lead decision makers to attach greater priority to a problem. While difficulties clearly have objective roots and are not

38 Everett Rogers, Diffusion of Innovations, 4th ed. (New York: Free Press, 1995), 11, 22–23.

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merely “constructed,” many issues vie for political attention.39 In this competition for the attention of decision makers, a striking change that becomes cognitively available can induce domestic actors to pay more attention to the problem that this innovation purports to resolve. The appearance of a foreign model can thus influence domestic priorities. Supply can highlight and stimulate demand.

The adoption of an innovation by one country also signals the feasi-bility of change and in this way gives an impulse for emulation by other nations. This precedent suggests that the opposition of powerful sec-tors to reform can be overcome. What looked difficult if not impossible suddenly appears realistic. Contagion thus occurs as the representative-ness heuristic prompts political actors to overestimate the significance of a single case, namely, the frontrunner’s experience. The demonstra-tion effect resulting from the external supply of a new model can thus help to stimulate domestic demand for imitating this change.

Demand and supply factors are therefore not independent and can reinforce and interact with one another. As the identification of a prob-lem prompts openness and receptivity to new solutions, so the appear-ance of a solution can call attention to problems. Indeed, demand and supply can partly substitute for each other in propelling institutional reform. Strong demand pushes for change even if an attractive solution has not yet become available. In turn, a bold and apparently promising solution can stimulate change even if there is no urgent need for it. Ac-cordingly, deep crises cry out for countermeasures and induce policy- makers to do something, whatever it may be. A clever innovation, in turn, can tempt policymakers: “Why not give it a try?” As an impetus for reform, high demand can therefore compensate for moderate sup-ply, and high supply for moderate demand. In this vein, Latin Ameri-can countries in the 1980s and 1990s desperately sought to control runaway inflation, even after they had run out of promising ideas for new stabilization plans; inversely, the appearance of Chile’s model of pension privatization inspired emulation even where financial problems did not require such a drastic reform, as in El Salvador.40 These ex-amples demonstrate the partial substitution of demand and supply as moving causes of institutional change.

Certainly, however, there are limits to this “compensatory” effect. If either demand or supply falls below a certain threshold (that would

39 Jones and Baumgartner (fn. 14).40 Carmelo Mesa-Lago and Ricardo Córdova, “Social Security Reform in El Salvador,” in María

Amparo Cruz-Saco and Carmelo Mesa-Lago, eds., Do Options Exist? (Pittsburgh: University of Pitts-burgh Press, 1998), 121–27.

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need to be determined by careful empirical investigations), even their interaction may not suffice to propel institutional change. Despite their often impressive momentum, waves of change therefore rarely produce transformations in all political units as limited demand forestalls their further advance. Further, given the probabilistic nature of political ex-planations, contingency, such as a leader’s skills, also plays a role.41

By emphasizing supply factors and arguing that solutions frequently appear through learning from foreign models and ideas, the present theory of change goes beyond the domestic focus of conventional institutionalist arguments. These theories tend to overlook the international dimension of reform that arises from the emulation of external solutions.42 Rational choice attributes institutional creation, maintenance, and change to the interests and power capabilities of the relevant political forces, primarily constitutionally empowered domestic actors. External influences, such as the inspiration provided by foreign experiences, lie outside the pur-view of this argument. In her preference-driven analysis of constitution making in democratizing Eastern Europe, Barbara Geddes,43 for in-stance, fails to discuss the appeal of French semipresidentialism in the region. Similarly, historical institutionalism highlights the inertial force of domestic establishments. But their “increasing returns” may be out-weighed by the promise of a novel blueprint designed in another coun-try. Path dependency, arising from the weight of domestic institutional arrangements, can be overcome by the external supply of reform ideas.

Although rational choice institutionalism and even some recent ver-sions of historical institutionalism rest on choice-theoretic foundations, they do not sufficiently stress that decisions on institutional mainte-nance and change involve choices between alternatives but depict re-form as an original creation or a response to the unsustainability of ex-isting arrangements. Rational choice attributes change to the interests and cost-benefit calculations of the relevant political actors. It implicitly regards as unproblematic the design of a reform that maximizes these actors’ interests and thus overestimates the driving force of preferences and overlooks the importance of ideas and models as crucial inputs for change. Actors may try to attain a goal but lack know-how. The lack of a promising blueprint may stifle interest maximization. Therefore, an important independent contribution to institutional change can occur when the fact of reform in a foreign country suddenly makes a blueprint

41 Giovanni Capoccia, Defending Democracy (Baltimore: Johns Hopkins University Press, 2005); Leif Lewin, Democratic Accountability (Cambridge: Harvard University Press, 2007).

42 Mitchell Orenstein, Privatizing Pensions (Princeton: Princeton University Press, 2008), chap. 1.43 Geddes, “A Comparative Perspective on the Leninist Legacy in Eastern Europe,” Comparative

Political Studies 28 ( July 1995).

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cognitively available for adoption elsewhere. Preferences as such are insufficient; ideas are necessary as well.44

At the same time, severe problems plaguing existing arrangements do not guarantee reform; the availability of an attractive solution is also necessary. Many difficulties go unresolved. Eighteenth-century Poland, for instance, lived for decades with a dysfunctional institutional system that gave every individual parliamentarian veto rights—a system that persisted until the neighboring great powers took advantage of the re-sulting weakness and carved the country up. Similarly, socialist parties that took office in interwar Europe lacked a blueprint for reforming capitalism and therefore remained ineffective during the 1920s. Only with the appearance of Keynesianism did they manage to advance to-ward their goals.45 Thus, the supply side of institutional change, which this article highlights, is crucial for any convincing theory.

the transformation of “developmental states”: trade liberalization

Space constraints preclude a systematic test of the new approach. But to illustrate its potential for elucidating a wide range of changes, the following sections briefly examine transformations of major economic, social, and political institutions. These vignettes seek to capture institu-tional transformations of differential depth, namely, the revamping of policy institutions, social citizenship regimes, and political regimes. I focus on “critical cases” that would not be expected in light of prevailing institutionalist arguments.46

The wave of drastic, rapid trade liberalization that has swept the world during the last three decades came as a surprise. It radically over-hauled long-established economic institutions and phased out the “de-velopmental states” that many countries had built, especially since the 1930s. Given the stakes that powerful economic and political actors had in the status quo, the equilibrium arguments of rational choice and the path-dependency arguments of historical institutionalism would predict continuity. Thus, this issue-area constitutes an “unlikely case” for my new theory—but a wave of profound institutional transforma-tion did in fact occur.

After the Great Depression of 1929 had discredited economic liber-alism and the Soviet Union’s crash course on industrialization seemed

44 Orenstein (fn. 42), chap. 1.45 Adam Przeworski, Capitalism and Social Democracy (Cambridge: Cambridge University Press,

1985), 32–38.46 I thus follow the approach to case selection in Lewin (fn. 41), 6–8.

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to suggest the promise of state intervention, many countries, especially in the Third World, changed course. Rather than allowing private prof-it motives and the “anarchy of the market” to guide economic develop-ment, states began to plan economic activities, restrain market forces, and protect nascent industries. Heavy-handed trade controls consti-tuted a central instrument of this economic nationalism.47 Of course, the beneficiaries—coddled industrialists and workers in the protected sectors—defended the perpetuation of these controls. Shielded from for-eign competition, many industries were woefully inefficient. Dependent on imports of capital goods yet unable to sell their shoddy, overpriced products abroad, they contributed to structural deficits in foreign ex-change. Devaluations designed to correct these imbalances transferred the costs of these privileges to society as a whole and fueled inflation, distorting economic development and exacerbating social inequality.48

The resistance of powerful stakeholders that operated as distributional coalitions blocked government’s occasional efforts at trade liberalization, however.49 In fact, many government leaders preferred the status quo for political reasons: state interventionism allowed them to bestow econom-ic benefits on their cronies in return for loyalty and support. Political rationality thus sustained a system riddled with economic irrational-ity. In emphasizing the importance of political self-interest, rational choice depicted countries as stuck in this dysfunctional equilibrium.50 Highlighting path dependency, historical institutionalism also did not foresee departures from long-standing trajectories, which provided “in-creasing returns” to powerful economic sectors and state actors.

But right when these institutionalist arguments came to predominate in political science, an unexpected wave of trade liberalization swept the world. The present theory helps account for this surprising depar-ture. As for the demand side of change, risk seeking in the domain of losses transformed conventional calculations of political rationality and provided an opening for economic rationality. Facing severe economic crises, political leaders turned adversity to advantage and used trade liberalization, along with other market reforms, for restoring economic stability and political governability. The result was a striking transfor-mation of many countries’ development model: state interventionism quickly gave way to freer markets.51

47 Robert Kaufman, “How Societies Change Development Models or Keep Them,” in Gary Ger-effi and Donald Wyman, eds., Manufacturing Miracles (Princeton: Princeton University Press, 1990).

48 John Sheahan, Patterns of Development in Latin America (Princeton: Princeton University Press, 1987), chaps. 4–5.

49 Mancur Olson, The Rise and Decline of Nations (New Haven: Yale University Press, 1982).50 Bates (fn. 7); Barbara Geddes, Politician’s Dilemma (Berkeley: University of California Press,

1994); criticism in Grindle (fn. 8).51 Sebastian Edwards, Crisis and Reform in Latin America (Oxford: Oxford University Press, 1995).

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The worsening problems of economic nationalism reached crisis proportions during the 1980s in many Latin American and African countries.52 Governments had racked up huge foreign debt to sustain their tottering development model. The debt crisis erupting in 1982 capped this lifeline and threatened many nations with economic col-lapse; inflation exploded, reaching triple or even quadruple digits, espe-cially in Latin America.

Facing the abyss, governments finally abandoned gradual adjustment efforts and swallowed the bitter pill of drastic reform,53 with its uncer-tain economic, social, and political repercussions. Rapid trade liberal-ization would help force prices down and induce domestic industries to become more efficient—or go bankrupt. Of course, the latter outcome would aggravate the economic crisis, and even economically successful adjustment would boost unemployment. No one could know whether fragile democracies and countries in transition from authoritarian rule could withstand the resulting stress and strain. If protests erupted, for-eign investors would pull back, limiting the economic payoffs of re-form and potentially trapping the country in a low-growth equilibrium. Where governments therefore suppressed protests, democracy would suffer and perhaps fall to renewed authoritarianism. Thus, trade liber-alization and other market reforms held tremendous economic, social, and political risks.

Only risk seeking in the domain of losses made government leaders willing to impose short-term pain in the hope of reaping long-term gain. As statements by and interviews with leading decision makers suggest, they perceived looming catastrophe and therefore took the leap into the unknown. They were aware of the inherent risks, but—in line with the predictions of prospect theory—preferred overshooting to doing too little. When in doubt, they systematically erred on the side of bold-ness.54 For instance, “during the worst economic crisis that [Ghana] had ever faced,” leftist president Jerry Rawlings suddenly “reversed course” and imposed orthodox stabilization and bold liberalization, despite the “grave danger” and “enormous political risks” inherent in this unexpected departure, which constituted a “huge political and personal gamble.”55

52 John Williamson and Stephan Haggard, “The Political Conditions for Economic Reform,” in John Williamson, ed., The Political Economy of Policy Reform (Washington, D.C.: Institute for Inter-national Economics, 1994), 562–64.

53 Robert Bates and Anne Krueger, “Generalizations Arising from the Country Studies,” in Bates and Krueger, eds., Political and Economic Interactions in Economic Policy Reform (Oxford: Blackwell, 1993), 452–54.

54 Weyland (fn. 8), chap. 5.55 Herbst (fn. 8), 29–31.

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Bolivia was suffering hyperinflation of approximately 20,000 percent in 1985 when President Victor Paz Estenssoro adopted similarly painful and risky measures, although many politicians foresaw fierce popular re-sistance and the vice president feared a “bloodbath.”56 Facing economic collapse, Russia’s Boris Yeltsin in 1991 also imposed liberalization, al-though he “understood the enormous risk involved in initiating reforms.” Yeltsin took measures that his key economic aide Yegor Gaidar regarded as “extremely risky and dangerous.”57 Thus, risk seeking in the domain of losses clearly inspired the initiation of economic liberalization.

These dramatic measures indeed had mixed outcomes. While they managed to impose stability and unleash renewed growth in some countries, such as Argentina, Ghana, Peru, and Uganda, they ran afoul of economic or political problems in others, such as Nigeria, Venezu-ela, and—for years—Brazil. In the former countries trade liberalization brought a true inflection in development trajectory. Not only did it help to rescue countries from seemingly hopeless crises, but it also ended de-cades of protectionist state interventionism and ushered in global inte-gration. Rational choice and historical institutionalism did not foresee these dramatic departures from persistent equilibria and long-standing development paths.

The demand for change triggered reform because there was a supply of recipes for combating the crisis (even at great risk). While creat-ing significant transitional cost, trade liberalization held the promise of pulling countries out of their nationalist cul-de-sac and setting them on a path to growth. Standard economic theory had long advocated that countries specialize in their areas of comparative advantage: whereas capital-rich developed countries would build advanced industry, de-veloping countries would use their cheap workforce to concentrate on labor-intensive branches. First World economists had preached the theory for decades but it did not find much resonance in the Third World during the heyday of economic nationalism.

In the 1980s two factors created greater receptivity. First, the debt crisis pushed decision makers into the domain of losses and stimulated a demand for risky change, as just discussed. Second, concrete, vivid ex-periences highlighted the supply of change and offered models for em-ulation. By the late 1970s East Asia’s newly industrializing economies, especially South Korea and Taiwan, attracted worldwide attention with their export success and lasting growth boom, and in the mid-1980s

56 Author interview with Juan Cariaga, Bolivia’s former finance minister (1985–87), La Paz, June 29, 2006.

57 Gaidar, Days of Defeat and Victory (Seattle: University of Washington Press, 1999), 87, 116.

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Chile began to achieve similar performance. These examples demon-strated the feasibility of an export-oriented, seemingly liberal trade strategy and suggested its promise.58 The precedent of these “miracle performers” stimulated a wave of emulation. Careful statistical analyses indeed demonstrate that these precedents played a significant role in triggering trade liberalization in many developing countries: their suc-cess is associated with a higher likelihood of emulation.59

Policymakers in Latin America, for instance, were well aware of Chile’s success and took inspiration from it, as their policy statements and my field research confirm. The architect of rapid trade liberaliza-tion in Venezuela, Miguel Rodríguez, was impressed by Chile’s suc-cessful export drive and sought to emulate it.60 Argentine president Carlos Menem said that he wanted “to link Argentine production with the phenomena of economic globalization,” following “the ex-ample of Chile next door.”61 And El Salvador’s former finance minister proclaimed that his country sought to become “the Chile of Central America.”62

However, the focus on these successful cases represents a deviation from the postulates of comprehensive rationality, which mandates a balanced evaluation of all relevant evidence. Numerous countries were experimenting with export-oriented strategies, but decision makers did not consider the average results. Instead, they disregarded unsuccess-ful reform experiences and highlighted only the “miracle performers.”63 This is a noteworthy instance of selective perception, driven by the heuristics of availability and representativeness. The striking success of Korea, Taiwan, and Chile grabbed decision makers’ attention and made their experiences—not the mediocre performers—the ones most “available” to them.

Moreover, the predominant interpretation of the East Asian suc-cess was inaccurate. Rather than being models of economic liberalism,

58 Edwards (fn. 51), 48–55.59 Covadonga Meseguer, Learning about Policies (Cambridge: Cambridge University Press, 2008),

chap. 5; see also Beth Simmons and Zachary Elkins, “The Globalization of Liberalization,” American Political Science Review 98 (February 2004); David Levi-Faur, ed., The Global Diffusion of Regulatory Capitalism = Annals of the American Academy of Political and Social Science 598 (March 2005).

60 Author interview with Miguel Rodríguez, Venezuela’s former planning minister (1989–92), Ca-racas, June 6, 1996.

61 Mario Baizan, Conversaciones con Carlos Menem [Conversations with Carlos Menem] (Buenos Aires: Editorial Fraterna, 1993), 38.

62 Author interview with Juan Daboub, El Salvador’s former finance minister (1999–2004), San Salvador, July 9, 2004; see also Centro Internacional para el Desarrollo Económico, ed., Soluciones Descentralizadas/Privadas a Problemas Públicos [Decentralized/Private Solutions to Public Problems] (San Salvador: cinde, 1994); and for Peru, see Carlos Boloña, Cambio de Rumbo [Change of Direc-tion] (Lima: ielm, 1993), 32–34.

63 Meseguer (fn. 59), chap. 5.

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as orthodox economists claimed,64 South Korea and Taiwan had prospered due to profound interventionism by strong developmental states.65 These states deliberately nurtured certain industrial sectors and supported their ambitious export drives, while closing their economies to foreign imports. This development strategy diverged significantly from a free-market approach.

Most emulators indeed failed to achieve the miracle performances of Korea, Taiwan, and Chile. Instead, export expansion and especially growth approximated the meager average performance of earlier adopt-ers, a performance that decision makers had neglected in their fixation on the most prominent “available” success stories. Many governments simply opened their economies to foreign competition but failed to support export sectors, as Korea, Taiwan, and even Chile had done. The result was some deindustrialization and limited average growth.66

In sum, the move to trade liberalization brought the unexpected dismantling of developmental states in many countries—a stunning inflection of trajectory that rational choice and historical institutional-ism did not foresee. This reform wave was spurred by economic crises, which triggered risk seeking in the domain of losses; it helped to allevi-ate or overcome these crises and brought clear net improvement. But since the spread of this innovation resulted from boundedly rational learning distorted by the heuristics of availability and representative-ness, its results fell short of decision makers’ hopes.

the transformation of “welfare states”: social security privatization

A central institution built by modern states is the social security system. The welfare state often consumes a large share of public spending. It constitutes a crucial interface between state and society, guaranteeing social citizenship and shaping stratification.67 By cushioning people against the vicissitudes of domestic and global markets, it safeguards sociopolitical stability. It therefore has enormous economic, social, and political significance.

64 Bela Balassa, The Newly Industrializing Countries in the World Economy (New York: Pergamon, 1981), 30–33.

65 Robert Wade, Governing the Market (Princeton: Princeton University Press, 1990); Atul Kohli, State-Directed Development (Cambridge: Cambridge University Press, 2004).

66 José Palma, “Four Sources of ‘De-Industrialization,’” in José Antonio Ocampo, ed., Beyond Re-forms (Stanford, Calif.: Stanford University Press, 2005).

67 Gøsta Esping-Andersen, The Three Worlds of Welfare Capitalism (Princeton: Princeton University Press, 1990), chap. 3.

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As a result, these social citizenship regimes are difficult to change. Current beneficiaries insist on their entitlements, and active workers defend their future rights. To reap the fruits of their financial contri-butions, they demand that the intergenerational contract be upheld. Political parties are therefore loath to touch social security.

Because of these characteristics, social security policy has inspired prominent theories of historical institutionalism. The finding that wel-fare states create their own stakeholders led Paul Pierson to his theory of path dependency.68 As established pension systems create “increas-ing returns” for politicians and governments, stasis tends to prevail over change. Historical institutionalism therefore expects substantial retrenchment to be rare. Since large numbers of voters are interested in the welfare state, rational choice similarly predicts that politicians face electoral incentives to resist drastic change. Given these prominent arguments, the social citizenship regime constitutes a likely case for institutional continuity.

But surprisingly, a wave of structural social security reform has in fact swept across the world, especially Latin America and Eastern Europe, yet also advanced industrialized countries such as Britain and Swe-den.69 Change has often been dramatic: pay-as-you-go (payg) systems, in which current workers fund retirees’ pensions in an intergenerational contract administered by the state, have been fully or partially replaced by individual retirement accounts run by private companies that invest workers’ contributions in the financial market. The pensions in these programs are dependent on each individual’s accumulated proceeds. And thus pension privatization replaces social solidarity, redistribution, and state responsibility with individual effort and private initiative. In line with the principles of economic liberalism, the allocation of risk shifts from society to the individual. During the last three decades, twenty-nine countries on four continents have enacted this kind of change.70 As these nations differ greatly in economic conditions, social structure, political institutions, and regime type, historical-institution-alist theories of path dependency have great difficulty accounting for this spread of similarity amid diversity.

By contrast, the theory advanced in this article points to the interplay of demand and supply factors. Financial problems and crises triggered risk seeking in the domain of losses, while the private pension system instituted in 1980–81 in Chile supplied a novel solution that looked

68 Pierson, Dismantling the Welfare State? (Cambridge: Cambridge University Press, 1994).69 Raúl Madrid, Retiring the State (Stanford, Calif.: Stanford University Press, 2003); Katharina

Müller, Privatising Old-Age Security (Cheltenham: Edward Elgar, 2003); Sarah Brooks, “Interdepen-dent and Domestic Foundations of Policy Change,” International Studies Quarterly 49 ( June 2005).

70 Orenstein (fn. 42), chap. 1.

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promising to boundedly rational decision makers. Demand and supply operated in varying combinations. The privatization wave started in countries that suffered from severe financial challenges, but its momen-tum soon affected nations with less acute difficulties that were swept along by the availability and initial success of the Chilean model.

As regards demand factors, many countries faced worsening finan-cial problems because their payg systems matured and life expectancy increased so that current workers had to sustain more and more retirees. These problems were exacerbated in the Third World and transition econ-omies, as domestic liberalization and global competition shrank formal labor markets and unemployment or informal employment kept work-ers from paying social security taxes. Experts warned about the “ascent to bankruptcy” of social security systems .71 During the 1980s countries such as Argentina had to declare “pension emergencies” and suspend pay-ments to retirees; other countries, such as Poland with its shock program of marketization after 1989, experienced unsustainable spending increas-es. As numerous studies suggest, these problems pushed policymakers into the domain of losses and stimulated a propensity for bold and risky countermeasures. In Argentina the severe and uncontrollable financial crisis induced the government of Carlos Menem to adopt “a radical program that included . . . a profound reform” with unforeseeable fiscal and political costs.72 In Poland the expenditure explosion eventually led the government to embrace privatization, despite enormous social and political resistance.73 Italy boldly restructured its pension system when “the government found itself in a losses domain” and became “risk ac-ceptant and therefore willing to pursue risky reform projects.”74

Privatizing a payg system was indeed highly risky. Current workers and retirees could be expected to put up fierce resistance to dissolving this intergenerational contract, turning reform into a dangerous po-litical gamble. The new system also often had a precarious economic base. Many capital markets were too underdeveloped to guarantee a reasonable rate of return on individual pension contributions. And states lacked the fiscal strength to fund existing retirement benefits af-ter active workers deposited their social security contributions in their own private accounts.75 For all these reasons, pension privatization held

71 Carmelo Mesa-Lago, Ascent to Bankruptcy (Pittsburgh: University of Pittsburgh, 1989).72 Gustavo Demarco, “The Argentine Pension System Reform and International Lessons,” in

Kurt Weyland, ed., Learning from Foreign Models in Latin American Policy Reform (Washington, D.C.: Woodrow Wilson Center Press, 2004), 82–84.

73 Müller (fn. 69), 82–87.74 Vis (fn. 13), 102.75 Madrid (fn. 69); Brooks (fn. 69); Müller (fn. 69); Stephen Kay and Tapen Sinha, “Lessons from

Pension Reform in the Americas,” in Kay and Sinha, eds., Lessons from Pension Reform in the Americas (Oxford: Oxford University Press, 2008).

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great economic and political risks, which decision makers—after years of hesitation—chose to shoulder only in crisis situations. Thus, risk seeking in the domain of losses is crucial for explaining the demand side of this dramatic institutional change.

Severe problems, however, did not generate their own solution. In-stead, the reform wave was triggered by the appearance of a new model, Chilean pension privatization. As this novel system quickly seemed to attain success, the availability and representativeness heuristics led pol-icymakers in neighboring countries to emulate it.

Decision makers stress the significance of these supply factors. A leading pension reformer in Argentina claimed: “If the Chilean case had not existed, it’s probable that we still wouldn’t have the reform.”76 Bolivia’s top budget official reported that hearing a speech by the ar-chitect of Chile’s reform led her to the realization that this blueprint could resolve the worsening financial problems plaguing Bolivia’s so-cial security system, which she had unsuccessfully tried to combat for years.77 Selective perception focused attention on an innovation de-signed in neighboring Chile, although for complicated economic and technical reasons, a hybrid pension reform model developed in Europe may have offered a better solution for Bolivia. But this faraway model was not cognitively available to Bolivian decision makers.78 The avail-ability heuristic thus helps explain the geographic clustering of pension privatization. As rationality is bounded and this shortcut highlights primarily intraregional innovations, the reform wave advanced first inside Latin America. The promotional activities of the World Bank and Chilean pension reformers later made the new model available to Eastern Europe as well.79

The representativeness heuristic, in turn, helps account for the up-surge of pension privatization and the typical S-shaped curve of dif-fusion.80 Reports of the initial success of Chile’s innovation induced policymakers in other countries to imitate the new model. In this way, they placed excessive weight on a short stretch of experience in a single country, disregarding potential chance factors in line with the represen-tativeness heuristic. In fact, rates of return later diminished significantly in Chile. And claims about the beneficial impact of pension privatiza-

76 Reported in Madrid (fn. 69), 114–15.77 Author interview with Helga Salinas, former leader of Bolivia’s pension reform team (1990–93),

La Paz, July 26, 2002; similar for El Salvador, author interview with Víctor Ramírez, leading reform team member, San Salvador, July 8, 2004.

78 Weyland (fn. 13), 107–8.79 Orenstein (fn. 42), chap. 1.80 Rogers (fn. 38), 11, 22–23; see Brooks (fn. 69), 275.

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tion on national savings, investment, and growth reflected problematic associative reasoning and would not withstand careful empirical scru-tiny.81 Soon, Joseph Stiglitz, then chief economist of the World Bank, called the main selling points of pension privatization “myths that have . . . derailed rational decision-making.”82 In sum, problematic infer-ences suggested by cognitive heuristics helped to propel the wave of structural social security reform.

These shortcuts shaped decision making in several ways. They fo-cused attention on one foreign model to the exclusion of others. Based on limited information, they imbued this model with an aura of suc-cess. In these ways, they induced policymakers to emulate the foreign innovation. Indeed, they helped to alter the very constellation of power and interests. By suggesting that pension privatization would boost national savings, investment, and growth, they drew economic state agencies that had traditionally cared little about social security into this issue-area. As reform advocates obtained crucial support from power-ful economic and finance ministers, the inferences derived via cognitive heuristics helped to tip the balance of political power.

The demand and supply factors highlighted in my theory came to-gether in various combinations. Many countries that privatized social security were in serious financial straits and therefore accepted the economic, social, and political risks of structural transformation. Risk seeking in the domain of losses induced policymakers to undertake bold reform. Other nations did not face immediate financial collapse, but the availability of the Chilean model and the (problematic) im-pression of great promise led them toward emulation. Even seemingly unlikely candidates—such as Costa Rica, El Salvador, and Kazakh-stan—therefore jumped on the bandwagon. Thus, demand push was crucial in some cases, supply pull in others. But there also were many countries, for instance, in Africa and South Asia, where demand or supply factors—alone or in combination—did not reach the threshold for propelling structural pension reform.

In sum, the new theory can explain a wave of major institutional change that rational choice and historical institutionalism did not fore-see. While domestic stakeholders and their political clout certainly play an important role and condition the likelihood of pension privatization, dramatic change is more frequent than theories of path dependency

81 Demarco (fn. 72), 86.82 Peter Orszag and Joseph Stiglitz, “Rethinking Pension Reform” (Paper for conference on “New

Ideas about Old Age Security,” World Bank, Washington, D.C., September 14–15, 1999), 4; see also Kay and Sinha (fn. 75), 6-7.

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claim. Cognitive-psychological arguments about risk seeking in the do-main of losses and the inferential heuristics of bounded rationality help account for these surprising departures from long-established trends.

the transformation of political regimes: the rise of corporatist authoritarianism

If economic and social policy institutions are difficult to change, replac-ing political regimes is even harder. Important stakeholders have socio- economic interests in maintaining established structures of decision making.83 Indeed, regimes shape the distribution of political power, which can affect life-and-death issues such as war making. Regimes are also often imbued with special legitimacy and depicted as reflections of long-standing cultural and historical traditions. For these reasons, historical institutionalism expects countries to follow their established regime trajectory. Rational choice also foresees stasis because the es-tablished regime is an equilibrium from which—ceteris paribus—no relevant actor has an incentive to depart.

But in fact, there have been several waves of democratization.84 Mili-tary coups and dictatorships have spread in similarly dramatic ways.85 For illustrative purposes, I examine the principal “reverse wave,” the advance of authoritarianism and corporatism in Europe and Latin America during the 1920s and 1930s. This riptide of dictatorial rule is an “unlikely case” for the supply side of my theory, because most dif-fusion studies analyze the spread of normatively positive changes. The contagion emanating from political retrogression also diverges from the optimism underlying functionalism and thus highlights the difference of my novel argument from this discredited approach.

Regime change carries tremendous political and personal risks. Tran-sitions often involve the use or threat of violence. Incumbent elites can draw on organized coercion to defend their prerogatives, while chal-lengers may resort to forceful contention. Given these dangers, political actors normally prefer caution and accept the established regime, how-ever grudgingly. Rational choice stresses that collective action dilem-mas pose particular obstacles to regime overthrow, and historical in-stitutionalism expects institutional inertia, deep-seated cultural values, and historical traditions to keep countries on long-standing political trajectories.

83 Carles Boix, Democracy and Redistribution (Cambridge: Cambridge University Press, 2003).84 Huntington (fn. 10); Markoff (fn. 10); Kurzman (fn. 10).85 Li and Thompson (fn. 31).

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What, then, accounts for regime transformations when they do oc-cur, and why do they frequently occur in waves? As regards the demand side of change, the present theory points to acute problems that push powerful elites and sectors of the population into the domain of losses and turn them risk acceptant. The crisis of the interwar years resulted from the tremendous strain caused by World War I, the first total war on European soil. Staggering human losses and economic devasta-tion combined with the political turmoil produced by the breakdown of monarchies and multinational empires. Several countries suffered ruinous hyperinflation in the 1920s. Political and intellectual upheaval was also momentous. The war capped the expectation of gradual liberal progress nurtured during the long nineteenth century; liberalism’s key institutions, the market economy and pluralist, representative democ-racy, encountered grave doubts and aggressive challenges.86

Widespread perception of crisis triggered risk acceptance and prompted challenges to established regimes, especially the new and fragile democracies instituted after the First World War. The 1920s was a decade of coup attempts, rebellions, and other forms of violent contention. Assailed by a multitude of problems, important elites and sectors of the population diverged from their normal penchant for pru-dence and risked liberty if not life. For instance, Adolf Hitler sought to imitate Benito Mussolini’s 1922 “March on Rome” in November 1923 but landed in jail. Thus, actors proceeded with unusual boldness when facing a domain of losses.

This demand-side factor helps explain the origins and timing of the authoritarian-corporatist wave. It began in Europe, where the turmoil from World War I was most intense—not in Latin America. Miklós Horthy established a dictatorship in 1919 in Hungary, which had ex-perienced painful territorial losses and undergone a leftist revolution in 1918–19.87 Italy, where Mussolini usurped power in 1922, felt cheated of the fruits of victory and experienced enormous social and political turmoil after the war. The East European countries affected next, such as Poland with Józef Pil⁄sudski’s takeover in 1926, suffered nationality problems and economic collapse, which led to hyperinflation in Poland (1922–23). Given democracy’s stronger roots in Germany and Austria, their regimes fell only under the onslaught of the Great Depression in

86 Sheri Berman, The Primacy of Politics (Cambridge: Cambridge University Press, 2006), chaps. 5–6.

87 Thomas Sakmyster, “From Habsburg Admiral to Hungarian Regent,” East European Quarterly 17 (Summer 1983); Jerzy Kochanowski, “Horthy und Pil⁄sudski,” in Erwin Oberländer, ed., Autoritäre Regime in Ostmittel- und Südosteuropa [Authoritarian Regimes in East-Central and Southeastern Eu-rope] (Paderborn: Schöningh, 2001), 37–44.

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the 1930s.88 Hitler’s nsdap, for instance, had faded into marginality by the late 1920s89 but received an unexpected boost from the economic crash and resulting mass unemployment. The unprecedented distress caused by the interruption of international trade also triggered an au-thoritarian-corporatist wave in Latin America, “where governments tumbled like dominoes in 1930”90 and military coups removed (semi-)democracies in Argentina and Brazil that same year.

In supporting violent power grabs or calling for coups at a time of seeming chaos, established elites, interest groups, and ordinary citizens knowingly incurred great risk. Because authoritarian rulers are unac-countable and impossible to control, supporting their rise entails a real gamble. Many dictators indeed reneged on the promises with which they captured power. Pil⁄sudski, for instance, depicted himself as the evenhanded national savior, but after establishing his predominance, he quickly rejected overtures from the left and aligned with the right.91 Spanish dictator Miguel Primo de Rivera failed to honor his pledge to relinquish power after three months.92 Influential actors often recog-nized these risks yet incurred them willingly under the pressure of the crisis. For instance, the archconservative circles that helped Hitler take over the government in January 1933 were wary of his plebeian radi-calism. They knew they were playing with fire—but took the gamble nevertheless.93

Thus, unusually severe economic and political crises pushed impor-tant sectors into the domain of losses and induced them to accept the risks inherent in a move from fragile democracy to authoritarian cor-poratism or fascism. Risk seeking in the domain of losses is crucial for explaining the “demand” for drastic regime change. Not all fragile de-mocracies succumbed to the authoritarian-corporatist wave, however,94 and crisis as such does not predict breakdown. Thus, demand factors alone are not sufficient as causal variables.

88 For Austria, see Emmerich Tálos, “Zum Herrschaftssystem des Austrofaschismus,” in Oberlän-der (fn. 87), 149.

89 Karl Dietrich Bracher, Die Auflösung der Weimarer Republik [The Dissolution of the Weimar Republic] (Düsseldorf: Droste, 1978), 97–98.

90 Peter Smith, “The Breakdown of Democracy in Argentina, 1916–30,” in Juan Linz and Alfred Stepan, eds., The Breakdown of Democratic Regimes: Latin America (Baltimore: Johns Hopkins Univer-sity Press, 1978), 5.

91 Joseph Rothschild, “The Ideological, Political, and Economic Background of Pilsudski’s Coup D’Etat of 1926,” Political Science Quarterly 78 ( June 1963), 224, 227.

92 Alejandro Quiroga, Making Spaniards (Houndmills: Palgrave Macmillan, 2007), 33.93 Bracher (fn. 89), 600–624; Henry Turner, Hitler’s Thirty Days to Power (Reading, Mass.: Addi-

son-Wesley, 1996), 12–17, 116–17, 140–48, 182.94 Capoccia (fn. 41).

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The supply side also played a decisive role in the authoritarian-cor-poratist wave. The importance of novel ideas becomes particularly no-ticeable during the interwar years. Whereas democracy has turned into a well-defined package that is adopted “wholesale,”95 its alternatives are less standardized. The authoritarian and corporatist models emerging in the early twentieth century were therefore crucial in providing pow-erful elites with “solutions” for the problems that in their eyes plagued crisis-ridden democracies.

Supply-side factors operated at two levels. First, over the preced-ing decades, right-wing intellectuals had created a climate of opinion that, while hostile to Marxism and communism, fiercely rejected liberal democracy, political pluralism, and free-market economics as well.96 These reactionary ideas, which proved attractive to many academics, writers, and artists and spurred innumerable right-wing movements, associations, parties, and even paramilitary organizations, prepared the ground for the authoritarian-corporatist wave.97

Second, Mussolini’s regime in Italy demonstrated the feasibility of a transition away from democracy and offered concrete ideas for reor-dering state-society relations.98 The Duce’s 1922 power grab exerted immediate contagion effects. It inspired Hitler’s 1923 coup.99 Spain’s Primo de Rivera established a dictatorship in 1923, saying “it was ‘Mussolini’s seizure of power’ that showed him what he ‘ought to do’ in order ‘to save’ his own country.”100 Lithuanian nationalists intended to emulate Mussolini’s success in early 1923, but their coup occurred only in late 1926, when Marshal Pil⁄sudski’s takeover in neighboring Poland seems to have provided an additional impulse.101

95 Ruth Collier, Paths to Democracy (Cambridge: Cambridge University Press, 1999).96 Berman (fn. 86) highlights the novelty and theoretical significance of this cluster of right-wing

ideas, stressing their socioeconomic side, namely, politically guided state interventionism in the market.97 Kurt Sontheimer, Antidemokratisches Denken in der Weimarer Republik [Anti-Democratic Think-

ing in the Weimar Republic] (Munich: Deutscher Taschenbuch Verlag, 1978); Zeev Sternhell, The Birth of Fascist Ideology (Princeton: Princeton University Press, 1994); Berman (fn. 86); David Rock, Authoritarian Argentina (Berkeley: University of California Press, 1995); Alberto Spektorowski, The Origins of Argentina’s Revolution of the Right (Notre Dame, Ind.: University of Notre Dame Press, 2003).

98 Hitler’s takeover in 1933 stimulated a second wave of diffusion, especially in Eastern Europe and the Balkans; interestingly, authoritarian leaders sometimes established preemptive dictatorships to keep true fascists, who felt encouraged by the rise of national socialism, from capturing power; Nancy Bermeo, Ordinary People in Extraordinary Times (Princeton: Princeton University Press, 2003), 44–46.

99 Alan Cassels, “Mussolini and German Nationalism, 1922–25,” Journal of Modern History 35 ( June 1963), 146–51.

100 Shlomo Ben-Ami, Fascism from Above (Oxford: Clarendon, 1983), 71; similar quote in James Rial, Revolution from Above (Fairfax, Va.: George Mason University Press, 1986), 122; see also Quiroga (fn. 93), 146.

101 Raimundas Lopata, “Die Entstehung des autoritären Regimes in Litauen,” in Oberländer (fn. 87), 111–13.

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In the authoritarian-corporatist wave, the heuristics of availability and representativeness again played a crucial role, shaping, limiting, and distorting decision-makers’ attention to and evaluation of the pertinent information. Whereas similarities in economic and political development made Mussolini’s example more relevant to Central and Eastern Europe, where preconditions for fascism existed, it actually at-tracted more attention in other Latin countries, especially the Iberian peninsula and Latin America; long-standing cultural and historical connections made the novel Italian regime more available in those na-tions. For instance, as the Duce set out to create a “new state” (Stato Nuovo), Portuguese dictator António de Oliveira Salazar and Brazilian strongman Getúlio Vargas followed suit with their own Estado Novo. Mussolini’s effort to control capital-labor relations with a corporatist system of interest mediation proved particularly contagious, spurring emulation efforts in Argentina (1930–31), Spain (1926–30), Portugal (from 1933 onward), and Brazil (from 1937 onward). Indeed, decision makers in Brazil copied provisions of Italy’s Carta del Lavoro almost word for word.102

Thus, the special availability resulting from similarities in language, culture, and history proved stronger than considerations of function-al need and rational benefit. For instance, Spain and Portugal, which established authoritarian regimes earlier than several East European countries, had suffered much less turmoil as a result of World War I.103 Whereas demand factors alone would have produced diffusion of institu-tional transformation primarily inside Europe, the particular receptivity to supply explains this subregional and cross-regional spread of corporat-ist authoritarianism. Italian fascism certainly exerted contagion effects in Eastern Europe as well,104 but they were not as strong as those in Iberia and Latin America (and in Italy’s neighbor Austria).105 Thus, the avail-ability heuristic shaped the reverse wave of the 1920s and 1930s.

The representativeness heuristic also proved important. Compared with the crises afflicting many new democracies, Mussolini’s regime

102 Evaristo de Moraes Filho, O Problema do Sindicato único no Brasil [The Problem of the Sin-gle Union in Brazil] (São Paulo: Alfa-Omega, 1952), 243–48, 250, 269; Sérgio Amad Costa, Estado e Controle Sindical no Brasil [State and Union Control in Brazil] (São Paulo: T.A. Queiroz, 1986), 62–66, 77; Rock (fn. 97), 89–93, 113; Spektorowski (fn. 97), 67–91; Smith (fn. 90), 17; Ben-Ami (fn. 100), 191; Rial (fn. 101), 206–7; Hugh Kay, Salazar and Modern Portugal (New York: Hawthorn, 1970), 67–69; António Costa Pinto, Salazar’s Dictatorship and European Fascism (Boulder, Colo.: So-cial Science Monographs, 1995), 207; Juan Linz, “Fascism, Breakdown of Democracy, Authoritarian and Totalitarian Regimes” (Madrid: Instituto Juan March, Working Paper 2002/179), 35–36.

103 E.g., Costa Pinto (fn. 102), 135.104 E.g., Nikolaj Poppetrov, “Flucht aus der Demokratie,” in Oberländer (fn. 87), 393; Hans-Chris-

tian Maner, “Voraussetzungen der autoritären Monarchie in Rumänien,” in Oberländer (fn. 87), 439.105 Tálos (fn. 89), 152, 157.

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seemed to achieve a great deal of initial success. The enormous social and political upheaval of the late 1910s and early 1920s gave way to tranquillity and order, albeit under nondemocratic rule. The economy soon stabilized, and the “newborn” Italy projected activism and strength in its foreign policy. Impressed by these accomplishments, many observ-ers extolled Mussolini’s dictatorship as an example for other countries to follow. These rash evaluations overlooked crucial signs of trouble, such as the Duce’s unpredictability and military adventurism, which eventually led Italy toward disaster. In line with the representativeness heuristic, however, the early indications of success inspired hasty infer-ences about the inherent promise of fascism, which motivated emula-tion efforts in a number of countries.106

Ironically, however, the core of Italian fascism was not transfer-able to many of these nations. Since neither the Iberian nor the Latin American countries had established full mass politics,107 they could not import fascist rule centered on a movement party that mobilized and channeled widespread participation.108 The novelty of Mussolini’s regime, which differed from prototypical authoritarian rule and had totalitarian tendencies,109 held only limited attraction. Instead, most emulators installed more typical dictatorships that imported only parts of the original model, such as corporatist systems of interest represen-tation. In fact, even this partial imitation had different purposes. Spain, Portugal, and Brazil instituted state corporatism less to suppress capi-tal-labor conflict than to preempt its very emergence. This “anticipated reaction,” which was not demand driven, demonstrates the significance of the Italian model as a supply factor.

In sum, this brief examination of the interwar reverse wave dem-onstrates the importance of severe crises for stimulating demand for drastic institutional change, while a particularly available and seem-ingly successful model such as Italian fascism created a supply of solu-tions. Corporatist authoritarianism, hostile to both Marxist socialism and political and economic liberalism, was imposed in countries rav-aged by the repercussions of the First World War and later of the Great

106 Gregory Luebbert, Liberalism, Fascism, or Social Democracy (Oxford: Oxford University Press, 1991), 274–76; Berman (fn. 86), 135–36; Linz (fn. 102), 5; Ben-Ami (fn. 100), 71, 156, 191; Costa Pinto (fn. 102), 116, 207; Kay (fn. 102), 67, 122; Lopata (fn. 101), 112 n. 32; Moraes (fn. 102), 243, 246; Rial (fn. 100), 111, 122; Rock (fn. 97), 71–73, 107–8; Spektorowski (fn. 97), 20–21, 71–72.

107 In Argentina many workers were recent immigrants and therefore noncitizens and nonvoters.108 Costa Pinto (fn. 102), 145, 174–75; Robert Levine, Father of the Poor? (Cambridge: Cam-

bridge University Press, 1998), 53–55; Rock (fn. 97), 91–93, 108–9; in general, Luebbert (fn. 106), 259–65; Stanley Payne, A History of Fascism, 1914–1945 (Madison: University of Wisconsin Press, 1995), 340–41.

109 Linz (fn. 102).

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Depression. As powerful elites were groping for a way to deal with these problems and the resulting threats to their own interests, Italian fascism seemed to offer remedies. But the medicine was worse than the disease and a number of these experiments ended in disaster. Thus, contrary to functionalist hopes, institutional change does not necessar-ily bring improvement. By highlighting the bounds of rationality and actors’ conditional propensity for risky gambles, the new theory offered here can capture this range of variation.

conclusion

The debate between different variants of institutionalism has focused to a large extent on the question of microfoundations. In recent years, a number of historical institutionalists (albeit not all) have acceded to the insistent demands of rational choice theorists and based their own arguments on choice-theoretic reasoning. Paul Pierson, for instance, derives his claims about path dependency from economic arguments about increasing returns. Peter Hall and David Soskice rest their dis-cussion of “varieties of capitalism” on an actor-centered framework and stress the importance of strategic interaction. More generally, Peter Hall and Rosemary Taylor argue that historical institutionalism draws not only on culturalist reasoning but also on the calculus approach of rational choice.110 By placing its theoretical edifice on the foundation established by its initial rival, this current of historical institutionalism is about to forgo its distinctiveness.

Strands of rational choice, in turn, have moved closer to historical institutionalism.111 As critics bemoaned the deficient empirical orienta-tion of their approach,112 leading rational choice institutionalists em-braced historical analysis and began to draw on interpretivist thinking. Leaving aside the demand for scientific generalization and abstraction from spatiotemporal parameters, they have conducted case studies of specific political arrangements that prevailed decades or centuries ago.113 They have also incorporated arguments about perceptions, frames, and ideas to make sense of surprising turns of historical events.114 Yet de-

110 Pierson (fn. 68); Peter Hall and David Soskice, eds., Varieties of Capitalism (Oxford: Oxford University Press, 2001); Hall and Taylor (fn. 2).

111 Katznelson and Weingast (fn. 2).112 Donald Green and Ian Shapiro, Pathologies of Rational Choice Theory (New Haven: Yale Uni-

versity Press, 1994).113 Bates et al. (fn. 6).114 Robert Bates, Rui de Figueiredo, and Barry Weingast, “The Politics of Interpretation,” Politics

and Society 26 (December 1998).

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spite their effort to do explanatory justice to specific “situations,” they have retained their fundamental assumptions concerning the rational pursuit of “preferences.”115

By drawing on cognitive psychology’s well-corroborated findings about human judgment and choice, the present article offers a more solid and realistic, empirically grounded alternative to this emerging synthesis. As a growing number of scholars have stressed,116 it is most useful for an empirical discipline such as political science to derive its theories from a firm empirical base, rather than from ideal-typical pos-tulates that clearly fail to capture the operation of actual decision mak-ing.117 By now it has become abundantly clear that human rationality is distinctly bounded. It is therefore time for political science to use this fundamental insight as its starting point for theory building.

While having a firmer microfoundation than rational choice, this approach improves on historical institutionalism’s emphasis on path dependency by highlighting the discontinuous and disproportionate nature of institutional change. Most of the time adjustments and modi-fications are minor. But this insufficiency of adaptation over time in-creases the problem load on the existing institutional framework. These unresolved difficulties eventually push relevant actors into the domain of losses, induce them to accept significant risks, and thus bring about dramatic transformations. This argument accounts for the tendency of institutional change to proceed in a pattern of “punctuated equilib-rium.”118 Periods of relative stasis are interrupted by bursts of profound change. Because these breakpoints are striking and momentous, they also tend to exert demonstration effects and set in motion waves of contagion. The heuristics of availability and representativeness provide the causal mechanisms shaping these processes of diffusion, which his-torical institutionalists have rarely analyzed.119

In sum, this core of a new theory proposes a general explanation for the typical patterns of institutional transformation. By specifying the causal mechanisms that drive the eruption of profound and often wave-

115 Katznelson and Weingast (fn. 2).116 Jones (fn. 14); Jones and Baumgartner (fn. 14); Chrysostomos Mantzavinos, Individuals, Insti-

tutions, and Markets (Cambridge: Cambridge University Press, 2001); Douglass North, Understanding the Process of Economic Change (Princeton: Princeton University Press, 2005).

117 McFadden (fn. 18); Thaler (fn. 18); Kahneman and Tversky (fn. 19); Colin Camerer, George Loewenstein, and Matthew Rabin, eds., Advances in Behavioral Economics (Princeton: Princeton Uni-versity Press, 2004).

118 Krasner (fn. 5); see also Ruth Collier and David Collier, Shaping the Political Arena (Princeton: Princeton University Press, 1991).

119 Exceptions are Peter Hall, ed., The Political Power of Economic Ideas (Princeton: Princeton Uni-versity Press, 1989); and Heclo (fn. 30).

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like change after long stretches of continuity, it fills in important gaps in historical and rational choice institutionalism. The shift in people’s propensity for assuming risk identified by prospect theory is crucial for explaining striking turnarounds that end long periods of deterioration. While extant variants of institutionalism have difficulty accounting for these points of inflection, insights from cognitive psychology elucidate the underlying causal mechanism. They also explain how such a strik-ing change can transcend national borders and stimulate emulation ef-forts in other countries.

Due to these promising contributions, the novel approach merits further elaboration and empirical assessment. The next stage of theory development requires specifying how the new microfoundations play out in different constellations of power and interest. While for sim-plicity’s sake this article discussed generic decision makers, real actors differ in their perspectives, goals, and resources. For instance, rising in-flation pushes the dependently employed into the domain of losses, but investors who reap gains in the overnight market remain in the domain of gains. In a similar vein, the hope for increased savings derived via the representativeness heuristic from Chilean pension privatization im-presses economists but not trade unionists who care about social goals. Thus, to turn the present core into a full-fledged theory, the cognitive mechanisms highlighted in this article need to be mapped onto the conflicts and competition characterizing politics. Of course, these cog-nitive mechanisms themselves can shape the constellation of power and interests; the above-mentioned expectation of increased savings drew economic state agencies into the social security arena and thus shifted the balance of forces. Unraveling these interactions between the novel microfoundations and the institutions and structures of politics is the next task in theory building.