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Appendix The Bases of Diverse Preferences Orders Chapter 3 explored the implications of global, embedded, and behavioral rationality models for how firms rank institutional alternatives. This appendix details the origin of these rankings, or preference orders. Figure 3.1 was central to the chapter for it detailed how the context in which firms are situated affects their incentives to rank some institutional designs over others. It explained how the relationship between the specificity of firms’ relational investments (a proxy for their sectoral profile) and what system of governance is in place (a proxy for national economic system) determine the costs of sustaining a social contract. Based on figure 3.1, table A lets the costs of contracting (c) when employing a particular form of governance (x) at a specific moment in time (t) be positive and variable such that 0c(x)k t 1, where k indicates in what sector a firm is active depending on its degree of asset-specific relational investments. The table lists the high and low levels of governance costs associated with each level of asset specificity in the three alternative system of governance (x: L, E, C), where L represents a liberal market economy, E a centralized one, and C a coordinated market economy.1 Firms are assumed to retain their sectoral identity (i.e., they are characterized as k1, k2, k3, or k4 firms), and market integration is operationalized as the opportunity to engage in institutional arbitrage and to move from the high to the low end within the parameters of a given sector. If the opportunity to exit is captured graphically by the prospect of a jump between lines between two moments in time, the same action may be represented in table A as an opportunity to move from the high end of an interval of k to the lower end of an alternative interval of k.2 The global, embedded, and behavioral rationality models posit that firms’ preferences are a product of different utility functions. Let a represent the status quo institution , b an institutional alternative, t the moment at which evaluations are made, t1 a moment in the future, and t1 a moment in the past. Global rationality model posits that firms rank alternatives based on which alternative is associated with the 186 Appendix lowest governance costs in the future: Uk (at1  bt1). Embedded rationality model proposes that firms weigh the balance of costs and benefits from engaging in radical reform currently with how maintaining the status quo compares with past designs: Uk ((at1  at)  (at  bt)). Finally, behavioral model suggests that firms rank alternative after calculating the potential benefits of incremental reform at a future point versus the potential benefits of radical change at the same moment: Uk ((at  at1)  (at1  bt1)). Tables B, C, and D represent the preference orders of the three models based on tableA and the three utility functions.Table B specifies the preference orders of the global rationality model. It shows that firms’ preferences will converge across economic models depending on their levels of relational asset specificity. Table C lists the preferences of firms according to an embedded rationality model and shows that firms prefer extant designs. Alternatives are assumed to be ranked according to which is associated with lower governance costs, though strict models of embedded rationality offer few answers to how alternatives are ranked beyond the status quo. Finally, table D lists the preference orders derived by the behavioral rationality model. The table underscores that preference orders do not converge as often as in table B or as rarely as table C. If firms’ preferences were a function only of where they were located and whether market integration presented opportunities to engage in institutional arbitrage , the preference orders detailed in the tables B, C, and D are sufficient to identify empirical expectations. If, however, these preferences also are influenced by the nature of external multilateral institutions, then their preferences may take different forms. Multilateral designs may be dimensionalized in similar ways as national ones.Typologized in such ways, the combination of national (x) and multilateral institutions (y) generate nine hypothetical cases of open governance (xy): LL, LE, LC, EL, EE, EC, CL, CE, CC. Given the nine forms of open governance and four different sectors to which firms may belong, there are thirty-six hypothetical scenarios of how firms in different sectors will respond to alternative solutions to the design problem. Based on the...

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