Policy Concepts in 1000 Words: Rational Choice and the IAD

(podcast download)

‘Rational choice theory’ is easy to caricature and dismiss, but difficult to define and describe, because it refers to a very broad and diverse body of work. So, we can identify some broad features but recognise that some studies display them more than others:

  • Inspiration – the application of ideas and methods from economics to politics.
  • Approach – models and deductive reasoning. It creates models of the world based on a small number of propositions and a logical examination of their connections.
  • Assumptions – ‘instrumental rationality’. Individuals fulfil their preferences according to their beliefs regarding the most appropriate means to achieve them. This is an ‘intentional’ explanation of behaviour based on the goals of individuals rather than motivation by ‘habit, tradition, or social appropriateness’*
  • Aim – to establish how many, or what proportion of, political outcomes one can explain with reference to the choices of individuals under particular conditions.

We can also identify two main types. The first is the abstract work which often involves building models or creating discussions based on openly unrealistic assumptions – for example, people have perfect information and judgement; they can act ‘optimally’ when faced with any situation.

box 7.2 assumptions

‘Optimally’ is potentially misleading, since it refers to an ability to fulfil their individual preferences, by ranking them in order and being able to fulfil them. It does not necessarily refer to an optimal overall outcome, because things get complicated when many individuals, each seeking to fulfil their preferences, interact. We should also note that ‘rational’ refers to the ability to reason and act on reason (crucially, we do not have to assume that rational beings are selfish beings).

The second type involves more detailed and/ or realistic assumptions regarding the preferences of individuals and how they relate to specific institutional settings. In this case, the aim is to help explain outcomes.

The first type of work is a logical exercise, to help think through problems and often produce ‘paradoxical results’. Famous examples include:

  • the paradox of non-voting, in which we wonder why people vote when their individual vote makes a minimal difference.
  • the ‘free rider’ problem, in which we wonder why people would engage in collective group activity if they can benefit without engaging.
  • the ‘prisoner’s dilemma’, in which we demonstrate that two people making choices to satisfy their individual first preferences are worse off than if they cooperate to secure their second best preferences.
  • the ‘tragedy of the commons’, in which we demonstrate the potentially catastrophic, cumulative effect of individual choices regarding scarce ‘common pool resources’ such as fertile land, unpolluted water, clean air, and fishing stocks.

The identification of such ‘collective action problems’ prompts us to consider the role of government and public policy in solving them. For example, we may identify ‘public goods’ to justify the role of the state as a supplement to, or replacement for, the market. Public goods are ‘non-excludable’ (no-one can be excluded from enjoying their benefits) and ‘non-rival’ (their use by one person does not diminish their value to another). Common examples, based on the argument that the state must intervene when the market would fail, regard national defence (the government should tax its citizens and businesses and provide national security) and clean air (the government should use a range of policy instruments to discourage pollution or encourage non-pollution).

In turn, the role of the state, or its institutions, can be analysed in the same rational choicey way, perhaps divided into three types of question:

  1. To what extent should the state replace the market? Since state action generally involves a degree of coercion (including taxation and regulation), it is important to consider how appropriate each intervention is, and how it might compare to solutions based on trust within particular groups, non-state incentives, or private mechanisms to ensure cooperation.
  2. Will state action improve collective outcomes? There is large body of ‘social choice theory’ which exists to demonstrate that the state cannot produce any rule that would make all of its citizens better off. Rather, it must consider how possible and appropriate it is to produce winners and losers, and if the winners can compensate others for their losses.
  3. What are the unintended consequences to government action? There is also a literature arguing that the state can make things worse: public servants acting in their own, not the public’s interest; interest groups and businesses encouraged to waste a lot of resources securing government privileges; and, governments manipulating economic cycles to influence their election chances.

Indeed, rational choice presents us with a way in which to justify a role for government, or to argue for a minimal role for the state, in favour of the market.

The work of Elinor Ostrom and colleagues presents a third option. Ostrom’s work demonstrates the potential for non-market solutions to collective action problems based on a combination of trust and less impositional means (than government institutions), to minimize the costs of monitoring and enforcing collective agreements. This approach involves individuals seeking agreements with each other that could be enshrined in a set of meaningful rules (which is what we now think of as an institution). The rules may be enforced by a private rather than state authority – the ‘commons’ would remain common and actors would observe each other’s behaviour and report rule-breaking to the third party that everyone pays for and agrees to respect. For Ostrom, the theoretical aim was to identify the conditions that have to be met for some groups to organize themselves to solve a collective action problem without state coercion, while the empirical aim was to identify concrete examples of this process. This approach has proved to be influential, winning Ostrom the Nobel Prize for economics in 2009 and demonstrating the direct policy relevance of institutional rational choice analysis (see the Institutional Analysis and Development Framework, IAD).

Please note: this discussion is based largely on the 1st edition of Understanding Public Policy. The second edition devotes most of chapter 7 to

Policy Concepts in 1000 Words: the Institutional Analysis and Development Framework (IAD) and Governing the Commons (download)

*here is how that section appears in the 1st edition (without the Harvard referencing removed).

p133 UPP rational


Filed under 1000 words, public policy

18 responses to “Policy Concepts in 1000 Words: Rational Choice and the IAD

  1. Hello, I find this to be a very information account of Institutional Rational Choice/ IAD. I did not know they were the same theory oops. thank you that was very helpful to know, it was so nice also to read about the Nobel Prize for economics for Elinor Ostrom.
    Thank you,

    • I wouldn’t say they are the same theory – but they can relate to the same problem (in this case, collective action). Indeed, the IAD could have just as easily be included in a discussion of institutionalism.

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  5. Anne

    Excellent information and very clearly communicated. Thank you! Why is it that when you ask policy faculty what the difference between IRC and IAD, they won’t give you a direct answer. That’s rhetorical, but I do have a question(s). What other policy models follow the rational tradition? For example, PET, ACF, IAD, Multiple Streams, Structural choice, networks? I know that Deborah Stone disputes the rational project. Which models follow her logic? Social Construction, policy narrative? I’m having a difficult time extracting the praxis part of policy theory? All of them seem very abstract and unlike the messy reality of what occurs. Why is policy so model driven anyway? I appreciate any insight you can provide to what I believe is a nebulous field.

    • Thank you, Anne. Yes, it is a hard field to disentangle, largely because (as you would expect) there is no core question or focus for so many scholars. Instead, we coordinate when we can, and step back and reflect sometimes. To sort-of answer some of your questions (I am not sure exactly what the rational tradition is):
      1. Most theories make some reference to ‘bounded rationality’ to help explain individual behaviour (see this discussion of ‘model of the individual’ https://paulcairney.files.wordpress.com/2013/08/cairney-heikkila-2014-theories-of-the-pp.pdf)
      2. Then there is the Q of ontology: does the world exist independently of our knowledge of it? I guess most of the theories you identify say yes (and are ‘positivist’), while perhaps Stone and others focus more on the social construction of reality. Then there is a blurry middle (perhaps Social Construction and Policy Design, definitely the Narrative Policy Framework) in which people try to measure (using ‘positivist’ techniques) the effect of different social constructions.
      3. We simplify because we have to. The world is complicated but we need a simple way to understand and engage. We have to simplify more when we try to compare and explain more cases.

      • Anne

        Thank you for your answers. I have since listened to about 2 hours worth of your podcasts and appreciate that you explain complicated policy concepts in a way that facilitates long-term understanding.

        I have one additional question. I recently watched Elinor Ostrom’s Nobel speech and in passing the microphone to Williamson, her co-winner, she mentioned the influence of TCE on the IAD framework. The two concepts appear to be competing rather than complementary in my mind. Specifically, IAD discusses how cooperative action might occur. The cooperative part must contain an a priori assumption of trust…one would think. Thus, a discussion of opportunism would seem to contradict cooperative action. What is your impression?

      • Anne, from the top of my head, I could see a connection: if you find a way for everyone to agree to and follow the rules, and have them enforced routinely by a third party, perhaps it reduces the need for (for example) bilateral conflicts or contracts between each pair of actors. One might describe such a successful relationship as built on trust but without assuming that trust is necessarily present from the start.

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  8. Matt

    What do you think about “argumentative policy analysis” In which approach it should be placed?

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