The Review of Austrian Economics, 16:1, 45–62, 2003.
2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Path Dependence, Behavioral Rules, and the Role
of Entrepreneurship in Economic Change:
The Case of the Automobile Industry
GAIL M. HEFFERNAN email@example.com
Economics Department, Florida Institute of Technology, Patuvent River, Maryland
Abstract. This paper develops a complementary theory of path dependence based on rigidity resulting from the
choice of management system within the ﬁrm. Rules-following behavior introduces rigidity which can lead to
inefﬁcient path dependence within a ﬁrm. Entrepreneurial alertness, in a crisis, can prevent lock-in from occurring
since it leads people to alter perceptions and change behavior. An empirical look at the automobile industry
explores the idea of rules-following behavior inducing path dependence development and the potential for change
despite inefﬁcient path dependent behavior.
Key Words: path dependence, entrepreneurship, automobile industry, case studies
JEL classiﬁcation: L2.
Discussions of path dependence in the economy have focused attention on the possibility
that inefﬁcient technologies will be adopted and persist due to increasing returns, self-
reinforcing mechanisms, and externalities. Much of the focus has been on the possibility
of market failure due to industry-wide adoption of an inferior standard. Less attention has
been paid to the role of path dependence as it pertains to individual ﬁrms. Individual ﬁrms
may ﬁnd that the behavioral rules and routines that develop within the organization may be
a source of rigidity once a set of rules and routines has been adopted. This paper addresses
the question of whether the adoption of a set of rules within a ﬁrm causes it to exhibit path
dependence. It looks at the degree of rigidity that is introduced into the ﬁrm by adopting
a set of rules to organize production. It also looks at the ability of a ﬁrm, through internal
entrepreneurship, to change or modify an existing set of rules.
Few industries have received the type of attention that the automobile industry has over
the course of its long history. The wealth of empirical detail on the automobile industry
provides an interesting avenue for exploring how a particular set of rules emerges, and once
established remains in place. Rules tend to remain in place until market forces indicate
that that particular rules framework has outlived its usefulness. The automobile industry
developed two competing sets of rules and one set proved to be superior. This allows
for an empirical analysis of the persistence of rules following behavior. It also provides
empirical evidence that there is an impetus for change when a set of rules becomes clearly