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Three Models of Open Governance Chapter 3 Reform-oriented governments depend on support from the business sector to sustain and transform integral designs in the modern market economy. Thus, the conditions under which various business sectors are able to credibly commit to the designs championed by governments is a key analytical question for the study of institutional development in advanced market economies. Detailing firms’ preference orders enables predictions about the type of business coalitions that form when the economic and institutional environments surrounding firms change and about the general conditions under which their commitments to government reforms are lasting. However, because scholars make diverse claims about the structure of firms’ preferences and when these are transformed, studies reach different conclusions about the specific conditions under which firms’ commitments are credible. This chapter specifies the logical inferences of and derives hypotheses from three perspectives of firms based in behavioral, global, and embedded rationality models. These hypotheses are examined empirically in later chapters. The chapter employs discrete structural analysis to identify the conditions under which the three models expect the preferences of diverse firms to be strengthened , weakened, or transformed because of changes in internal and external parameters. Originating in the comparative economic organization literature (Simon 1976, 1978; Williamson 1991, 1996a), this method makes it possible to examine how variations in internal parameters such as the economic system in which a firm is embedded and the degree to which it depends on relationally specific social contracts interact with changes in external parameters like market integration and different forms of multilateralism to produce particular preference orders among firms over the design of national institutions. The chapter examines changes in external parameters sequentially in order to identify the independent and cumulative effects that different levels of market integration and distinct forms of multilateralism have for firms’ preference orders. An appendix detailing the logical inferences of the behavioral, global, and embedded rationality models complements the narrative presentation. Three Models of Open Governance 45 Theorizing the Preferences and Behavior of Firms A large literature on advanced market economies places the firm at the center of analysis. Firms are critical agents in transmitting market signals and potentially powerful political actors when coordinating their actions. The large majority of studies in political economy is centered on how the material interests of firms impact their policy preferences. The open economy politics literature, for example, links the material interests of firms that are exposed to international markets to firms’ policy preferences (see Keohane and Milner 1996; Frieden and Martin 2001; Lake 2009). It finds robust links between export-orientation and support for free trade, globally oriented financial services firms and the deregulation of capital markets, and between import-competing firms and support for policies of economic discrimination. What this literature does not fully specify is the link between policy preferences and institutional preferences.1 Because it relies on deducing preferences from economic theories based in factor endowment models, it offers no clear mechanism by which firms’ material interests translate into specific views over the form of economic regulation. For example, no precise answer is given to why firms that are equally exposed to the same international markets and that support similarly high levels of free trade or financial service liberalization support alternative forms of national and multilateral regulation when they are embedded in diverse national settings. Consequently, under what conditions firms’ commitments are credible to particular institutional forms cannot be specified. Institutional theories of preferences look to overcome the lacuna in materialist ones. There are three alternative approaches to theorizing firms’ institutional preferences anchored in global, embedded, and behavioral rationality models. Theories employing global rationality models suggest that firms’ preferences are a function of careful weighing of prospective alternatives and that past investments in institutions are highly discounted. Such models offer potentially parsimonious theories of institutional development, but they have difficulties accounting for why firms embedded in diverse national contexts often prefer different types of institutions. Contributions to historical institutionalism and the varieties of capitalism traditions help address this lacuna in global rationality models. In these traditions, the ability of firms to harness material endowments is a function of the institutional context in which they operate and firms are modeled as actors with stakes in institutional designs (see esp. Hall and Soskice 2001a). The two traditions offer means of explaining why similar types of firms embedded in diverse national contexts often hold different preferences, but they lack specifics when it comes to the conditions under which preference transformations occur. This...

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