Agents and Structures

International Studies Quarterly (1998) 42, 245270
Agents and Structures:

Two Views of Preferences,
Two Views of Institutions
WILLIAM ROBERTS CLARK
Princeton University
AND
Georgia Institute of Technology
Two analytically distinct approaches to the study of domestic politics have

been referred to as the new institutionalism. The fundamental difference
between the two brands of institutionalism can be seen in the way they
handle the relationship between agents and structures. Structure-
based approaches to institutions give ontological primacy to structures
and view agents as being constituted by them. Agency-centered ap-
proaches view human agents as ontologically primitive and view institu-
tions as structures that are created by goal-maximizing individuals. The
two approaches are compared, with special attention given to the way they
treat the preferences that actors hold. I argue that contrary to arguments
made by many structure-based theorists, the agency-centered approach is
capable of contributing to discussions regarding the sources of actor
preferences. A limited-information model of the strategic interaction
between workers and capitalists is used to demonstrate ways in which the
agency-centered approach can begin to make preferences endogenous.
Over the last two decades, two distinct brands of theorizing have both been dubbed
the new institutionalism. While there are some characteristics shared by all of the
new institutionalists, I argue that the two broad approaches to institutional
analysis can be distinguished by the unit of analysis they make ontologically
primitive (Wendt, 1987:337; Dessler, 1989). In one version of new institutional-
ism institutional structures are seen as either constraints on, or the products of,
individual choices; in the other, actors are seen as constituted by social structures
which are, in turn, constituted by the actions of these actors(Krasner, 1988:73; see
also Krasner, 1982). I will refer to the former group as agency-centered and the
latter as structure-based institutionalists.1
Authors note: This article has had an unusually long gestation period. Consequently, it is difficult to acknowledge all
who have contributed to its development, and many I do acknowledge may not recognize the final product. Nevertheless,
I thank Robert Bates, Paul Bonk, Kenneth Finegold, Colin Flint, Barbara Geddes, Ken Gilmore, Mark Hallerberg,
Robert Kaufman, Jack Levy, David Reeths, Michael Shafer, Steve Vallas, Alexander Wendt, Richard Wilson, Scott Wolfel
and participants at the Georgia Tech Political Economy Brown-Bag and the Rutgers University Political Economy
Seminar, and the editors and anonymous reviewers of this journal. I owe special thanks to William J. Long and Mark
Yellin for many insightful discussions on topics related to this paper.
1 I am indebted to Nancy Bermeo for these terms which capture a crucial difference between the schools in a language
I believe both schools would accept. My use of the terms agency-centered and structure-based are roughly equivalent to
Krasners (1988) utilitarian and institutionalist perspectives, except I would argue that Krasner is incorrect in
1998 International Studies Association.
Published by Blackwell Publishers, 350 Main Street, Malden, MA 02148, USA, and 108 Cowley Road, Oxford OX4 1JF, UK.
246 Agents and Structures
The most visible difference between agency-centered and structure-based ap-

proaches to institutions is methodological. Agency-centered institutionalists apply
the deductive, often formal, modeling techniques associated with economics to
political institutions.2 In contrast, structure-based institutionalists typically apply
the tools of historical-sociology and/or traditional political science to the study of
state structures and their effects on policy outcomes.3 Since these methodological
differences are tendencies and not unavoidable consequences of the theoretical
positions adopted by these schools, there is considerable opportunity for the creative
combination of approaches.4 Nevertheless, deeper epistemological and ontological
differences will continue to thwart the productive integration of these approaches
until they are brought to light. This paper is meant as a contribution to this process,
which promises to be a protracted one. The perspective adopted is meant to be
ecumenical, but not noncommittalit is a defense of the agency-centered approach
that seeks to incorporate and learn from structure-based criticisms.
My primary argument is that the gulf between structure-based and agency-
centered institutionalisms has been exacerbated by a semantic misunderstanding
that has led to an exaggeration of the conceptual differences that separate the way
these schools handle preferences. Structure-based institutionalists have emphasized
the ways in which institutions help define the interests actors hold, while agency-
centered approaches have focused on the ways in which actors behave given an
exogenously determined set of goals. While there has been a tendency in the
agency-centered literature to treat preferences as unproblematic, assertions by
structure-based institutionalists that the choice-theoretic technology typically em-
ployed by agency-centered theorists requires them to hold preferences constant and
therefore removes the formation of preferences from the purview of their studies
are overdrawn.
I will argue in this paper that the agency-centered approach to institutions,
particularly when it makes use of dynamic, limited-information game theory, is
capable of shedding considerable insight on the recursive relationship between
agent and structure, and that it is capable of addressing many of the concerns of
structure-based institutionalists and structurationist theorists.5 Furthermore, since
structurationist approaches have been closely associated with scientific realism, I
will also attempt to highlight the many tenets of scientific realism that are frequently
realized in the practice of agency-centered theorists.6
implying that the substantive positions of a narrow band of theorists who maintain that institutional change is frictionless
and tends toward efficient equilibria are a natural product of the choice-theoretic approach. One of Norths (1981, 1990)
main goals, for example, is to account for the persistence of inefficient property rights.
2 Examples are Shepsle, 1986, 1989, Weingast and Marshall, 1988, North, 1981, 1990, North and Weingast, 1989,
Geddes, 1991, Knight, 1992, Levi, 1988, and Calvert, 1995a, 1995b.
3 Representative works include Skocpol, 1985, Skocpol and Finegold, 1982, Finegold and Skocpol, 1984, Krasner,
1988, Stepan, 1978, Skowronek, 1982, and contributors to Evans, Skocpol, Rueschemeyer, et al., 1985, and Steinmo,
Thelen, and Longstreth, 1992. There are many fine critical reviews of the new institutionalisms: see Levi, 1988,
appendix, 1996a, Kiser and Hechter, 1991, Chong, 1994, Hall and Taylor, 1994, Pontusson, 1995, Cammack, 1992,
and Geddes, 1993. Keohane (1988) identifies two distinct approaches to international institutions that are similar to the
agency-centered and structure-based approaches to domestic institutions.
4 See Bates and Weingast, 1995, Laitin and Fearon, 1995, and Levi, 1996b.
5 I use the terms structure-based or structuralists to describe analysts who treat structures as ontologically primitive and
structurationists to describe analysts who recommend avoiding ontological reductionismthat is, giving primacy to
either agents or structures.
6 The realist philosophy of science, or scientific realism, has been posed as an epistemological alternative to
empiricism. Its defining features are that ontology (what exists) is independent of epistemology (what we know), that
abductive inferences are valid, and, therefore, that entities can exist even if they cannot be observed. See Aronson, 1984,
Harre, 1986, Bhashkar, 1979, and Aronson, Harre, and Way, 1995. Theorists taking an explicitly scientific realist
approach to international politics (Wendt, 1987; Dessler, 1989) have also stressed the approachs emphasis on
explanation as the determination of causal processes rather than the discovery of covering laws, or constant conjunctions.
Grafstein (1992) argues for a realist approach to the study of institutions.
WILLIAM ROBERTS CLARK 247
I will begin with a brief discussion of the ways in which structure-based and
agency-centered institutionalists typically handle preferences. I will then examine
the structure-based critique of exogenous preferences and provide an illustration
of the way agency-centered theorists can begin to make preferences endogenous.
Agents, Structures, and Preferences in Institutional Analysis

While there is considerable subtlety and variety within the approach, all structure-
based institutionalists maintain that the preferences actors hold are deeply embed-
ded in the structural environments in which they operate. Some structure-based
analysts, most notably those associated with the statist approach, go so far as to
assign agency to structures, while others make the weaker claim that institutions
shape the preferences that actors hold.
Structure-based institutionalism was born, in part, of a critique of pluralist and
marxist approaches that asserted that the state is not a mere arena on which the
game of politics is played, a cash-register that aggregates the preferences of
societal actors.7 Crude versions of this argument seem to be based on the assumption
that if a particular outcome cannot be traced back to the preferences of at least one
societal group, it must serve the interests of the state, or some faction within it. This,
often implicit, functionalist assertion can be seen as problematic from several
perspectives. Most fundamentally it commits the logical fallacy of affirming the
consequent.8 In addition, it reveals an approach that fails to take the strategic
nature of politics seriously.9 Political outcomes do not necessarily reflect the prefer-
ences of any one actor, or group of actors, rather they are a product of many actors
pursuing their interests. It is important to take this insight one step further: political
actions do not necessarily reveal preferences over outcomes either; at best they reveal
subjective beliefs about what actors consider the best response to the expected
behavior of other relevant actors. Finally, the public choice literature tells us that
collective decision procedures (those based on successive pair-wise comparisons, for
example) typically lead to outcomes which do not reflect either individual or group
preferences (Arrow, 1951:2).10
The notion that one must choose between viewing the state as a mere arena of
social conflict or as an actor in its own right sets up a false dichotomy. In between
these explanatory alternatives is an approach that views institutions as transforming,
or shaping political actions, rather than summing them. Bates (1987:10) captures
this perspective succinctly:
Rarely do we find a direct and obvious relation between economic

changes and political outcomes. Rather, we find the effects refracted,
7 Almond (1988) points out that the statists have misrepresented, or ignored, more sophisticated forms of pluralism,
such as the work of Schattschneider (1942), Wilson (1973), and Lowi (1964, 1969).
8 This is a logically invalid argument that commits the fallacy of affirming the consequent (McGaw and Watson,
1976:34). The logical structure of the argument is as follows:

State actors enact policies that benefit themselves or their constituents.
Policy x did not benefit any societal constituency.
The state enacted policy x.

State actors benefit from policy x.
This conclusion would be valid if the antecedent read state actors enact only those policies that benefit themselves or
their constituencies. If, however, it is understood that the policy process can lead to outcomes that do not satisfy the
antecedent above, then the conclusion is invalid, since it can be false even when all of the premises are true.
9 The strategic nature of politics is both a key insight of and the analytical domain of game theory (see Ordeshook,
1992:ch. 1).
10 It should be clear that this logic can be generalized beyond the context of voting to any situation in which actors
must choose between a set of greater than two alternatives that are addressed in a pair-wise manner.
as it were, through the societys institutional endowment. (Empha-

sis added)11
Unlike an approach to institutions that emphasizes the way they refract social
conflicts, the structure-based institutionalist attempt to assign the state inde-
pendent causal weight typically leads them to anthropomorphize it. That is, they
seek to demonstrate that the state may formulate and pursue goals (Skocpol,
1985:9), and in the process transform the state into an actor in its own right (March
and Olsen, 1984:738 (referring to institutions); Stepan, 1978; Krasner, 1984, 1988;
Haggard and Moon, 1983).
There is nothing inherently wrong with attributing human agency to collectivities:
the field of microeconomics has been quite successful in treating firms (collections
of individuals with diverse needs, goals, and desires) as if they were unitary
actors.12 The usefulness of the unitary actor assumption does depend, however,
on the goal of the study. The structure-based institutionalists use of the unitary
assumption, for example, interferes with their stated goal of developing an expla-
nation of political behavior that takes institutions seriously. When one speaks
about the state as an actor with interests, the effect is to black box all that goes
on within state institutions. This effect is quite clearly understood by international
relations theorists who have engaged in debates that have centered on the need to
maintain the unitary action assumption for explanations among states (Waltz, 1979)
versus the need to develop an understanding of what occurs within the policy
apparatus within states (Allison, 1971). What has emerged quite clearly from this
debate is that if one maintains the assumption of a state interest, one is prohibited
from speaking about the behavior of actors within the state. To explain the behavior
of actors within the state, we must disaggregate the state, and look at organizations
within it, the individuals who inhabit them, and the institutional framework that
structures their behavior. This task cannot be completed if institutions and the
state or even state actors are confounded.
Some structure-based institutionalists do attempt to distinguish between actors
and institutions, but they continue to argue that the behavior of actors is in the end
reducible to the institutions from which they emerge. These analysts (Krasner, 1988;
Smith, 1992) argue that choice-theoretic approaches address institutions only as
forms of constraints on actors, and not as independent forces that constitute the
actors themselves. According to this version of the structure-based argument insti-
tutions not only shape the conduct of actors, but also create them. If this is the case,
individual humans can be treated as epiphenomenalinstitutions both create them
and determine their behavior.
Because agency-centered theorists tend to think of institutions as sets of rules that
shape the behavior of actors (Shepsle, 1989), they are better able than structure-
based analysts to clearly delineate between agent and structure. Actors are agents
because they make choices in their attempt to achieve their goals. Institutions are
structures because they constrain the behavior of actors. Collections of actors can
more profitably be thought of as organizations than institutions (North, 1990).
When actors within an organization have sufficiently homogenous preferences, as
the firm under neo-classical assumptions, the organization can be treated as an
actor. If, however, we refer to the collectivity as an institution, and speak of it as
possessing interests, agent and structure are confounded in such a way as to
impede our analysis: it becomes difficult to separate the actors from the set of rules
11 See also Gourevitch, 1989:89, which argues along the same lines.
12 And its limitations within the field of economics has been demonstrated by the new economic organization
literature; for a review see Moe, 1985.
that structure their behavior. In game-theoretic terms, institutions specify the rules
of the game. They delineate the range of possible actions, and the payoffs that result
from the action combinations of the players (be they individuals or organizations).
While the structure-based institutionalists have attempted to establish the inter-
ests of states, or state actors, through inductive processes, the agency-centered
institutionalists typically employ either deductive or abductive reasoning to establish
the preferences that actors hold. The standard view of the agency-centered ap-
proach maintains that analysts deduce the choices of institutional actors from
axiomatic assumptions about human behavior.13 Most generally, this involves the
rational choice assumption that humans engage in goal-oriented behavior and
attempt to maximize utility; they try to do the best they can (Frohlich and
Oppenheimer, 1978:11; Frieden, 1991). There is considerable disagreement
over what constitutes rational action (Simon, 1955) and the extent to which
individuals consider the goals of others in their actions (Keohane, 1984:ch. 7;
Margolis, 1982), but the diverse versions of rational choice are all consistent with
this weak formulation.
While rational choice theorists all share the assumption of goal-oriented behavior,
exactly what that goal is varies according to the empirical situation under study.
Actors need not be driven by pecuniary intereststhe value they maximize is not
necessarily economic. In other words, while all rational choice theorists agree that
actors seek to maximize their interests, what that interest is remains the object of
theorizing. Establishing the preferences of actors is therefore a key and problematic
task for rational choice theorists. This task is accomplished in neo-classical micro-
economics through the identification of a functional prerequisite for firms. Firms
must achieve a long-run rate of return on investment if they are to continue to
survive. Decision makers within the firm may have other goals, such as serving
society by building a better mouse trap, improving working conditions for their
employees, or enhancing their own careers, but they are unlikely to be able to
advance these goals in the absence of long-run profitability. Agency-centered
institutionalists often apply a similar logic to establish the preferences of political
actors. Elected officials cannot pursue any goals if they are not in office; as a result,
political survivability will be the over-riding concern in their goal formation (Downs,
1957; Weingast and Marshall, 1988; Ames, 1987). Similarly, although rulers of
early modern states were at times faced with contradictory incentives, they sought
first and foremost to maximize net revenues (North, 1981; Levi, 1988) which
were a functional prerequisite for maintaining their monopoly on the use of
force.
Less recognized is the reliance of agency-centered theorists on abductive (or
retroductive) reasoninga form of reasoning that scientific realists argue
distinguishes the practice of scientists from the prescriptions of empiricist
epistemology (Hanson, 1969; Wendt, 1987). An abductive inference is an infer-
ence made about unobserved phenomena or processes on the basis of observa-
tion.14 For example, if I awake to find puddles in my driveway and infer that it
has rained during the night, I have made an abductive inference. Choice-
theoretic scholars make abductive inferences when they begin their analysis with
an observation and then ask, What preferences and beliefs must actors have held
to produce such behavior in equilibrium? This technique is obviously problematic
13 Citing Bueno de Mesquita, 1985, and Wendt, 1987:351, n. 36, implies that rational choice theorys reliance on
deductive reasoning places it in the empiricist, rather than realist, epistemological camp. I will argue to the contrary
below.
14 The key distinction between scientific realists and empiricists involves the ontological status of unobservables. The
former treats them as real, while the latter may permit unobservables into their analytical frameworks, but treats them
in a purely instrumental fashion.
from a falsificationist perspective unless new predictions are deduced from the
abductively inferred preferences and beliefs and tested on observations other than
those that sparked the study.15
While the establishment of institutional actors through deductive or abductive
means is problematic, it offers a key advantage over the inductive approach because
it allows us to (a) posit what actors goals will be, (b) deduce strategic alternatives
available to them, and (c) use this information to formulate falsifiable predictions
or explanations (Snidal, 1986:40). This allows us to avoid what Levi refers to as the
myth that interest equals action (Levi, 1996a:3).
This brief discussion of the ways in which structure-based and agency-centered
institutionalists characterize the motivations of political actors suggests that these
schools have found different solutions to the agent-structure problem. While both
approaches include agents and structures in their analysis, they differ markedly in
which they treat as ontologically primitive. The agency-centered approach shares
rational choices commitment to methodological individualism in the sense that an
explanation is not complete until the outcomes explained are traced back to the
behavior of individuals (Elster, 1989:158). Thus, while agency-centered theorists do
not dismiss the explanatory import of structural factors, they maintain an a priori
assumption that those structures are, themselves, to be viewed as the product of
human agency. Contrast this view with the structural approach, which stresses that
social structures have an existence that is independent of the behavior of the
individuals who inhabit them. The structural approach draws on a more sociological
tradition that can be traced back to Durkheims assertion that collective life did not
arise from individual life; on the contrary, it is the latter that emerged from the
former (Durkheim, 1984:2201; see also Mead, 1934:7). Thus, agency-centered
and structure-based theorists both include agents and structures in their analysis,
but they differ radically in their answers to what Calvert (1995a:218; see also
Udehn, 1996:172) refers to as the chicken and the egg questionIf institu-
tional structures are the product of human choices, how can they be said to
influence those choices?
Recently, some social theorists have argued that the stalemate between agency-
centered and structure-based approaches to the social sciences is based on a false
dichotomy, or the fallacy of the dualism of structure (Wendt, 1987; Giddens, 1979,
1984). These analysts claim that this dualism is transcended in structuration theory
by the theorem of the duality of structure, which maintains that the constitution of
agents and structures are not two independently given sets of phenomena; and
that the structural properties of social systems are both medium and outcome of
practices they recursively organize (Giddens, 1984:25). Thus, correct answers to
the chicken and the egg problem will not arise until we understand the recursive
relationship between structure and agent because [s]tructure is not external to
individuals. . . . It is in a certain sense more internal than exterior to their activities
(Giddens, 1984:25).
I wish to argue that because it requires analysts to make their assumptions about
the substantive entities and configurations posited by a theory explicit, game
theory is a useful ontological tool that can further our understanding of the recursive
relationship between agent and structure in a manner that is consistent with the
central assumptions of the agency-centered approach. Thus game theory is
compatible, though by no means uniquely so, with the theoretical goals of both
structure-based institutionalists and structurationist social theorists. Current
15 Green and Shapiro (1994) argue choice theory has shaky empirical foundations because choice theorists seldom
follow through on this. See contributions to Friedman, 1996, for counter claims. For an excellent introduction to theory
construction using retroductive logic see Lave and March, 1975.
practice16 in game theory states that the following aspects of a situation need to be
included in a model to yield explanations of political behavior:
1. a statement of who the actors are
2. a statement of the actions available to the actors
3. a statement of the order in which events take place
4. a statement about the expected consequences of the various possible action/
strategy combinations
5. a statement regarding what information is known to the actors when they act
6. a statement regarding the beliefs actors hold about the structure of the game
and the beliefs and preferences of the other actors
7. a statement of the actors preferences over the outcomes produced by the
various possible action/strategy combinations
Factors one through five can be thought of as structural factors. They may be the
product of individuals decisions, but they are not part of what determines the
essence of particular actors. While factors 6 and 7 are clearly related to the intrinsic
properties of individual actors, closer consideration reveals that the division be-
tween agent and structure in game theory is not nearly so clear cut. Rather than
address the recursive relationship between agent and structure that game theory
posits in the abstract, I will attempt to demonstrate insights that game theory might
shed on this issue in the context of a comparison of the ways agency-centered and
structure-based scholars tackle the problems of institutional analysis.
The Structure-Based Critique of Exogenous Preferences

The most powerful and consistent critique of the agency-centered approach to
institutions is that its assumption of fixed and exogenous preferences makes it
impossible to address the question of preference formation (Thelen and Steinmo,
1992; Steinmo, 1989; Weir, 1989). The logic of this critique typically advances in
the following manner:
a. Actors preferences change during the course of many interesting and impor-
tant political conflicts, and/or are endogenous to particular institutional ar-
rangements that are prone to change.
b. Agency-centered theory assumes actors preferences are fixed and exogenous.
c. Agency-centered theory is, therefore, ill-equipped to address many interesting
and important political conflicts.
There are at least three possible responses to this argument, each worthy of some
attention. First, it can be argued that, since much agency-centered theory is aimed
at explaining or predicting behavior based on a given set of preferences, this is not
an immanent critique (Stigler and Becker, 1977). Second, it can be argued that while
changes in preferences are rare, changes in strategies (easily handled by the
agency-centered technology) are much more common. Finally, while difficult, it is
possible to use the tools employed by agency-centered theorists to gain insights into
the process of preference formation. Note that these responses are not unrelated;
the second response suggests that the first response does not leave choice theorists
as dependent as they may, at first glance, appear. The third defense suggests that
choice theorists are not compelled to accept the first. I will address each response
in turn.
16 Current practice is exemplified in textbooks aimed at teaching applied game theory. See, for example, Morrow,
1994, or Rasmussen, 1989. As Kuhn (1970) has suggested, textbooks are a revealing place to view the habits of mind of
a research community.
As noted, the first response is that the attack on fixed preferences is not an
immanent critique. Since rational choice theorys central claim is that it provides a
technology that allows the analyst to use assumptions about preferences (and
information and available actions) to predict behavior, this line of argument
amounts to criticizing the approach for being unable to accomplish a task it had not
attempted. Thus, one could use this criticism to argue that rational choice theory
does not answer important questions, but not to argue that it does not answer the
questions it says it does. Many rational choice theorists are content to allow other
disciplines and approaches to explore where preferences come from and to use
their findings as inputs in their own studies. To some extent, it is the reticence of
some agency-centered theorists to address the question of preference formation that
has emboldened critics to charge that the approach is incapable of doing so.
The second defense is to demonstrate that many of the changes in preferences
observed by the agency-centered approachs critics are better understood as changes
in strategies, which rational choice theory may be uniquely qualified to explain. If
this can be done, the conclusion potentially drawn from the first responsethat
rational choice institutionalism is true, but trivialcan be avoided. I will argue
that much of what passes for debate over the applicability of rational choice models
in institutional analysis is driven by semantic confusion over the meaning of terms
such as preferences, interests, strategies, et cetera. Attention to the ontological implica-
tions of these terms can help to clarify their meaning. When rational choice theorists
use the term preferences they are referring to a dispositional trait of actorsspecifi-
cally, the way an actor values alternative outcomes of the decision process being
modeled. Preferences (along with beliefs) help define who an actor is. Strategies
(and the actions they involve), in contrast, define what an actor can do; they are the
actions that, taken together, produce outcomes. Strategies are means, preferences
are ends. Actors prefer ends, but they choose means. Most rational choice
models hold statements about who an actor is (what the actor likes and believes)
constant in order to produce statements about what that actor will do in particular
strategic environments. They typically do so through the use of comparative
statistics in which the preferences of actors are held constant and aspects of their
strategic environment (such as institutions) are allowed to vary. The appropriate
method (decision theory or game theory) is then used to see if the change in strategic
environment is expected to lead to a change in behavior.
Rational choice models do not typically employ the concept of interests, in part,
perhaps, because the terms ontological status is often unclear. On the one hand,
interests may be another word for preferences (e.g., the actors position in the
economy determined her interests), but more often, the term seems to refer to a
strategic choice (e.g., given the institutional environment in which she operated,
it was in her interest to do x). Much of the strength of the argument about the
limitations imposed on the usefulness of rational choice theory by the assumption
of fixed and exogenous preferences disappears when the conceptual confusion
surrounding the terms preferences, interests, and strategies is clarified. A few examples
may demonstrate this point.
While the assertion that institutions influence the preferences actors hold is a
common theme among historical institutionalists (Steinmo et al., 1992), many of
the examples they marshal in support of this hypothesis are more usefully inter-
preted as examples of institutions influencing the strategies actors choose. Hall, for
example, argues that a less fragmented union movement might have been inclined
to pursue neocorporatist solutions longer than the British unions did and it might
have been able to implement them more effectively (Hall, 1992:107). There is
considerable evidence to support this counterfactual claim, but the assertion that
in this case we can see how the institutions devised to represent the interests of
a social group, such as the working class, themselves affect the definition and
expression of those interests (Hall, 1992:107) can have controversial implications

for the use of the rational choice approach to the study of institutions. If the term
interests is meant to capture the actors preferences over outcomes, Halls assertion
can be used to support the argument that the practice of treating preferences as
exogenous may create problems for choice-theoretic institutional analysis by creat-
ing an endogeneity problem: institutions devised to represent interests (actors
preferences) themselves affect the definition of those interests (preferences). If in
contrast, the term interests is meant to refer to strategic choices of the actors, Halls
conclusion becomes: institutions devised to represent interests (actors choices)
themselves affect the definition of those interests (choices). Since it is not clear what
it would mean to represent an actors strategy choice there is prima facie cause to
understand Halls first use of the term interest to mean actors preferences. While it
is logically possible to assert that institutions devised to represent actors preferences
themselves affect the definition of those preferences, Halls counterfactual assertion
does not support this interpretation. Hall argues that a difference in institutions
might have led, not to a difference in the disposition, but to a difference in the
behavior of the actors. Under alternative institutional arrangements they would, we
are told, have been inclined not to value this or that outcome differently, but to
pursue neo-corporatist solutions longer and implement them more effectively.
Thus, Halls analysis of the British case leads to the conclusion that is quite
comprehensible from a choice-theoretic frameworkinstitutions devised to repre-
sent actors preferences themselves affect the strategies actors will choose.17
As the above example demonstrates, the use of a single term to refer to both the
disposition and the behavior of actors invites confusion. Conceptual confusion
between dispositions and behaviors (preferences and strategies) occurs frequently
in the structure-based literature. Similar instances occur in Weirs (1989) discussion
of Labours abandonment of nationalization in favor of demand management and
Rothsteins discussion (1992:39) of the effect of labor-market institutions on work-
ers preferences to join or not join unions. In the latter case, Rothstein, while
attempting to explain cross-national differences in the propensity of workers to join
unions, infers from Skocpols (1988) assertion of a correlation between labor-market
institutions and union densities that government labor-market institutions change
workers preferences whether or not to join unions and concludes that we cannot
understand national differences in unionization solely by using some sort of rational-
choice or game-theoretic approach, because we need to know how preferences were
established in the first place. There are at least two reasons to challenge this
conclusion. First, one cannot infer changes in preferences from a correlation
between institutional structures and behaviors unless one has examined the strategic
environment in which choices are made and eliminated other explanations for the
change in behavior without committing the inferential errors discussed above.
Second, if we view the decision to join a union as a strategic choice rather than an
outcome over which actors have preferences, the research question goes from being
something that many have argued is outside the domain of game theory to being
an example of precisely the form of human behavior game theory was developed
to explain.
As these examples indicate, the fact that structure-based and agency-centered
institutionalists often mean different things by the word preferences has discour-
aged a potentially fruitful dialogue on the sources of preferences from taking place.
17 This passage is less a criticism of Hall as it is a criticism of the implications drawn by two of the volumes editors
(Thelen and Steinmo, 1992). There is, in general, no tension between Halls work and the agency-centered approach
discussed in this paper. There is, for example, little difference between his understanding of institutions (Hall, 1986)
and the approach of Douglas North (1981, 1990). Thelen and Steinmo consider the former one of the historical-
interpretive institutionalists and the latter a rational choice institutionalist.
Instead, structure-based institutionalists have reached the conclusion that agency-

centered approaches cannot contribute to our understanding of this problem and
many agency-centered institutionalists have been content to let someone else deal
with this difficult question. If, however, the preferences that are changing in these
important cases can be conceived as strategies, then agency-centered theorists do
have a great deal to contribute to the understanding of these substantive problems.
Furthermore, even if what we are observing is a change in preferences, advances in
limited information game theory might allow agency-centered theorists to contrib-
ute to the understanding of this more difficult set of questions. Either way, little
progress is likely until some agreement is reached on what is meant by terms such
as preferences and strategies.
Toward an Agency-Centered Approach to Endogenous Preferences

Part of the confusion surrounding preferences and strategies is endemic to the
agency-centered approach. There exists no universal model of social behavior and
no general theory of preference formation. Instead, what exists is a sea of more or
less contextually specific models about different aspects of human behavior that
include a set of statements about the goals of the actors involved. As noted above,
what these models share is the assumption that the behavior to be explained is goal
oriented; assumptions about the goals of the actors are typically model specific.
Within the context of each model, it is assumed that actors have complete and
transitive preferences over a set of outcomes and that they choose strategies in an
attempt to obtain the most preferred outcome possible. Strategies are thought of as
being entirely instrumental in that actors should have no independent predilection
for one set of strategies over another (Frieden, 1997:6). Confusion surrounding
preferences and strategies may arise because while outcomes are typically thought
of as the terminal nodes of a game or decision tree, in fact, there is typically nothing
terminal about them. Actors are not typically thought to cease to exist at the end of
the game or decision problem. They collect their payoffscash their checks, file for
bankruptcy, enact policies, get removed from office, et cetera. Since the actors do
not cease to exist at the terminal node, the payoffs they receive can be thought of
as the values the players expect to receive, in equilibrium, from games that begin at
those terminal nodes. As a consequence, their payoffs can easily be thought of in
instrumental termsthat is, as means toward the satisfaction of some more funda-
mental goal. Most people have policy preferences, for example, not because they
place intrinsic value on the enactment of particular policies, but because they value
the expected effects of policies. An industrialist may lobby for trade protection
because she expects some more fundamental goal to be better met under protection
than under import competition. Note that in this framework preferences have an
ambiguous statusthey are the end of strategy choice, but are also the means of
satisfying some deeper, more fundamental goal. While this ambiguity invites con-
fusion,18 it also provides a mechanism for explaining changes in preferences. This
section explores this ambiguity further by examining the opportunity to explain
preferences by examining the role they play in satisfying deeper goals that actors
have while at the same time emphasizing the importance of keeping strategies and
preferences analytically distinct.19 As will, I hope, become clear, beliefs play an
important role in this process. Actors prefer a particular outcome because they believe
it will best satisfy some deeper goal. I explore these issues in the context of a simple
18 See Frieden, 1997, for a clear discussion of many of the potential pitfalls.
19 The approach adopted here is similar to Sens (1977) discussion of meta-rankings in that it posits a hierarchy of
preferences.
model of the process of class compromise in Western European democracies. It

should be stressed that the point of this modeling exercise is to clarify the agency-
centered approachs position on the difference between preferences and strategies.
Infinitely more sophisticated, descriptively accurate, and fertile models are available
elsewhere. Interested readers might start with Przeworski, 1985, which the current
discussion leans heavily upon.
Assume, for the moment, that individuals (in a particular concrete historical
setting, such as late twentieth century capitalism) have a first-order preference for
wealth maximization. Assume also, for the purposes of illustration, that two groups
of individuals (workers and capitalists) can be usefully represented by the actions of
their leaders (the head of a union confederation and the head of an employers
association; hereafter workers and capitalists). Workers maximize expected real
wages which are a function of real wages and the national level of employment, while
capitalists maximize profits which are a function of investment, the capital-output
ratio, and the real-wage level.20 First, assume that the workers have a choice between
exercising wage restraint (R) and pressing for real-wage increases via increased labor
militancy (M); but they are uncertain which action would help them best attain their
goals (the highest possible expected real wages). By way of example, suppose that
the primary source of their uncertainty revolves around the response of capitalists
to wage claims. Capitalists can respond to the actions of workers with either
continued investment (I) or disinvestment (D). Figure 1 illustrates this highly
stylized depiction of the strategic interaction between capital and labor. Note that
at this stage in the analysis wage restraint (R), worker militancy (M), investment
(I), and disinvestment (D) are actions that are the object of choice, and as such
FIG. 1. Wage RestraintInvestment Game
20 In this discussion we have assumed that workers satisfaction of wealth maximization is sufficiently linked to
increased real wages and employment that they can both be treated as unproblematic tastes. Note that there is nothing
about these assumptions that renders them incomprehensible from the standpoint of rational choice theory. Increases
in real wages and employment are clearly instrumental, and it is to a large extent an empirical question whether the
leaders of labor confederations pursue these goals as if they were pursuing their own wealth maximization. The theory
of the firm and principal agent analysis was developed precisely to provide a mechanism for opening up such black
boxes.
are strategies that are available to each of the actors. In contrast, increased wages,
increased employment, et cetera are outcomes of a process that is jointly determined
by the choices of workers and capitalists, but which cannot be fully controlled by either.
Since workers are assumed to have stable and known preferences regarding
wages and employment, it is possible to construct their preference ordering over
outcomes. Let us assume that workers would prefer increases in employment and
wages (Outcome 3) to all other outcomes and would prefer all outcomes to declines
in employment in the absence of offsetting wage increases (Outcome 2). Finally,
assume that workers prefer growth in employment (Outcome 1), even in the absence
of wage gains, to increased wages when accompanied by decreased employment
(Outcome 4).21 This statement of workers complete preference ordering (O3 >
O1 > O4 > O2) over outcomes does not tell us anything, however, about the
workers likely choice of strategy because this choice of strategy maps to outcomes
only when we and they have a set of expectations about the likely responses of
capitalists to worker behavior.22 For simplicity, we will assume that workers believe
that capitalists are either conditional investors or unconditional disinvestors but
are uncertain as to which type of capitalists they are dealing with.23 Both conditional
investors and unconditional disinvestors prefer O4 to O3, but the former prefers
O1 to O2.24
Given their belief that the capitalists are one or the other of the two types posited
above, workers can begin to think about the possible consequences of alternative
choices of strategy. Specifically, if capitalists are conditional investors (top panel of
Figure 2), a decision to exercise wage restraint amounts to a choice between O1 and
O4. Since we know from the preference ordering discussed above that workers
prefer O1 to O4, we can conclude that workers with the assumed preference
ordering will exercise restraint if they believe that capitalists are conditional inves-
tors (paths followed when players follow subgame perfect equilibrium strategies are
bold). Note that, if the capitalists response is fully and unambiguously anticipated,
choosing wage restraint is the strategic equivalent of choosing O1, while choosing
no restraint is the strategic equivalent of choosing O4. In contrast, if workers believe
that capitalists are unconditional disinvestors (bottom panel of Figure 2), choosing
no restraint is still the equivalent of choosing O4, but choosing restraint is now the
strategic equivalent of choosing O2.
This simple depiction of capital-labor relations can shed some light on meta-
theoretical debates concerning the limitations of agency-centered approaches to
institutions. First, note that workers preferences are identical in the two games, but
the strategies they are expected to choose in equilibrium are different. This suggests
that analysts who infer changing preferences from changes in behavior, or cross-
national differences in preferences from cross-national differences in behavior, may
be committing what psychologists refer to as the fundamental attribution error
(Ross, 1977; Miller, 1989; Miller, Ashton, and Mishal, 1990) or what Frieden refers
to as a sin of commission (Frieden, 1997:21). The problem is that there are a
number of logically possible reasons a labor confederation would pursue a strategy
of increased militancy at time t but wage restraint at time t + 1, and changing
21 Presumably because current restraint increases profits that can be reinvested in ways that increase worker
productivity and wages in the long run.

22 Similarly, it is impossible at this stage of the analysis (i.e., in the absence of propositions about capitals preferences
and therefore equilibrium behavior) to make meaningful inferences about workers preferences based on observations
of their behavior.
23 There are four logically possible strategies that capitalists can pursue. For brevity, only two are addressed here;
this amounts to an assumption that workers place a probability of zero on the chance that capitalists will adopt one of
these other strategies. Note that from this standpoint games of perfect information can be thought of as simplified
presentations of special cases of games of imperfect information.
24 We will put off, for the moment, a discussion of why capitalists might have one or another set of preferences.
FIG. 2. Equilibrium Behavior in Wage RestraintInvestment Game

for Two Types of Conditional Investors
preferences is only one of them. As the example here demonstrates, it is entirely

possible that workers preferences have been stable, but their beliefs about capital-
ists preferences (and therefore, equilibrium behavior) have changed. Alternatively,
it is possible that workers possessed no uncertainty about capitalists preferences,
but that the change in workers behavior is the result of a change in capitalists
preferences. Which of these possible explanations is the case is essentially an
empirical matter, and, while agency-centered theorists are reluctant to infer changes
in preferences from changes in behavior, there is nothing in the approach that rules
out changes in preferences. The agency-centered approachs position regarding

changing preferences is neither an empirical statement nor a logical deduction from
unquestionable axioms. It is, instead, a pragmatic, methodological rule of thumb
that maintains that theoretical approaches that search for explanations for changes
in behavior should examine the structural environment in which actors are embed-
ded before inferring that changes in preferences are the cause of observed changes
in behavior (Stigler and Becker, 1977).25
Since agency-centered theory does not rule out the possibility of changing
preferences, it must come to grips with the charge that it is incapable of explaining
changes in preferences or accept the charge that it cannot contribute to an
important source of human behavior. To address this question, it is crucial to clarify
further the distinction between preferences and strategies. As noted above,
when choice theorists assert that preferences must be held constant, they are
speaking exclusively about preferences over outcomes. That is, whatever is chosen
by the analyst and/or treated by the actors as the unquestioned goal of their behavior
in that context must be held constant if we are to be able to deduce propositions
about the recursive relationship between beliefs and actions. With few exceptions,
the choice of what should be treated as the outcomes over which actors have
preferences is not determined by empirical reality, but rather is a function of the
research question at hand. If, as in the above example, we are attempting to explain
the conditions under which the leaders of labor confederations will exercise wage
restraint, it is important to treat wage restraint as an action or strategy choiceas
a means to some other endnot as an outcome over which workers have prefer-
ences. If we treated it as an outcome that actors had preferences over, our explana-
tion would be tautologicalworkers choose restraint when they prefer it to
militancy. Thus, if we were to characterize the research problem addressed in the
wage-restraint game above as What explains the union confederation in country
Xs preference for restraint over labor militancy? and we accepted the notion that
rational choice theory cant explain preferences, we might wrongly infer that
rational choice theory cant contribute to our understanding of the strategic inter-
action between capital and labor. If, instead, we posed the research question as
What explains the union confederation in country Xs choice of wage restraint over
labor militancy? we could then provide an answer to this question in terms of
dispositional traits of actors (the preferences workers hold over alternative macro-
economic outcomes); the structure of the game (workers moved first and capitalists
moved last; capitalists knew workers choice when they decided but the reverse is
not true); the beliefs that actors held about the motivations and intentions of other
actors (as captured in their preferences over outcomes); and the way in which
strategy combinations mapped to macroeconomic outcomes (i.e., the implicit
macroeconomic model that the actors believe governs their world).26
Thus, with a few possible exceptions, the decision to rule a question out of bounds
for agency-centered approaches is a decision made by the analyst, not a consequence
of the subject being studied. If we conceive of the behavior in question as the product
of a choice made by agents rather than a reflection of the attributes of agents, we
render the question amenable to choice-theoretic analysis.27 There are possible
25 In this light, Wendts (1994) suggestion that rationalist and structurationist approaches possess rival hypotheses
regarding the stability of preferences that can and should be directly tested is a curiously empiricist position.
Agency-centered theorists tend to treat preferences as unobservables and recommend evaluating the veracity of
assumptions about preferences by comparing a models implications with observed experience.
26 Note that the contribution of game theory is not in identifying the correct model of a particular phenomenon, but
rather in using models to evaluate the internal logic of competing explanations and to generate testable propositions
about the world.
27 Even when actors are guided by cognitive scripts, using rules of thumb, or engaging in habit-driven behavior,
remembering that they retain the capacity to choose aids in understanding (a) the conditions under which they might
limits to this processit may be difficult to use rational choice models to explain
why some individuals prefer chocolate to vanilla ice cream, while others appear to
have the opposite (first-order) preferencebut for large swathes of human behavior
it is possible to explain the choices individuals make about actions by recognizing
the way in which they help the individuals accomplish (second-order) goals. Thus,
as noted above, for workers who are confident they are confronting a group of
capitalists who are conditional investors, wage restraint is the strategic equivalent
of O1 and labor militancy the equivalent of O4. There may come a point when, in
a particular context, workers are sufficiently certain that capitalists are conditional
investors that they come to associate the exercise of wage restraint with the
macroeconomic outcomes they expect it to produce (in combination with the
taken-for-granted capitalists best response). At this point, workers may come to
fully associate the means of wage restraint with the end of growth in employ-
ment. In which case, the subgames in which capitalists choose whether to invest or
disinvest could be replaced by a terminal node that describes the equilibrium
outcome, as in Figure 3. Note that replacing the capitalist decision nodes strips the
game of any strategic richness that it might have had. It is now up to the modeler
to tell the story about workers expectations about capitalist behavior when she
explains why, for example, the choice of not exercising restraint leads workers
directly to the terminal node of increased wages and decreased employment.
The point of this tree-trimming exercise is not to advocate turning game-
theoretic models into decision-theoretic ones,28 but to demonstrate that agency-
centered analysis can help us get a handle on where preferences come from. By
treating the link between choosing restraint and getting growth and employment as
unproblematic, we have proceeded to the point where the means are indistinguish-
able from the ends. Hence, if we are willing to accept that workers prefer O1 to O4,
we should not resist the assertion that workers prefer restraint to militancy. Thus,
given a particular structural environment (i.e., where workers always confront
capitalists who are conditional investors), workers can be said to have a preference for
wage restraint. It should be obvious, however, that when we do so, we have created
a situation where it is difficult to answer the question Why do workers prefer
restraint to militancy? without lapsing into tautology. To unpack preferences in a
meaningful way, we must show why it might be reasonable for workers to believe
that choosing restraint will get them growth in employment. To do so, we must
reverse the process of tree trimming. We must ask, What do workers think will
FIG. 3. Choice Between Wage Restraint and Increased Militancy When Workers
Believe That Capitalists Are Conditional Investors
choose not to choose and (b) the conditions under which these satisficing mechanisms will be abandoned in favor
of more explicitly intentional behavior. Thus, choice theory provides a useful counterfactual for understanding behavior
that is apparently not the product of choice.
28 Tsebelis (1989) explains the pitfalls of modeling game-theoretic situations as if they were decision-theoretic ones.
happen when they choose restraint, and how do these possible consequences map
onto their underlying values?
The model discussed above is just one simple attempt to answer that question,
though it is unlikely that it will be satisfactory to many readers. Part of the problem
is that I skated rather quickly over the questions as to (a) how the strategy combi-
nations produce the posited outcomes (employment, growth, etc.) and (b) why the
actors have the first-order preferences that have been attributed to them. It is
precisely this latter question that motivates critics of rational choice theory who
maintain that it cannot explain preferences. But if the preference for wage
restraint in the decision-theoretic model in Figure 3 can be at least potentially
explained by the development and testing of a model that examines what workers
hope to gain from restraint (such as the one in Figure 1), then it is not clear why the
preferences attributed to actors in that model cannot be similarly made endogenous
using rational choice methods.29 This in fact is what is commonly done,30 although,
because it is impossible for any one modeler to trace this hierarchy of choices back
to first-order preferences that are entirely intrinsic and therefore not at all instru-
mental, there is within each project some preferences that are taken as given. What
critics of the agency-centered approach fail to understand is that the mere fact that
certain second-order preferences are not explained in a particular model says
nothing about their explicability. They may be first-order primitives, but they may
just as well be second-order preferencesthe explanation for which, while compre-
hendable within an agency-centered framework, happens not to be the goal of the
model in question.
Another way the agency-centered approach can shed light on preference forma-
tion is through an analysis of belief formation, or learning.31 In the above example,
workers strategic preferences over wage restraint and militancy, given their more
fundamental preferences over macroeconomic outcomes, are driven by their beliefs
about the preferences held by capitalists. Limited-information game theory uses the
technology of Bayesian updating to examine the conditions under which strategic
interaction can lead to changes in the beliefs that actors hold. The application of
Bayesian decision theory to game theory amounts to an assumption that actors
behave as good scientific realiststhey use abductive inferences to learn about a
world in which real entities are not always observable.
Assume, again, that workers know they are confronting capitalists who are either
conditional investors or unconditional disinvestors, but they do not know which.
While workers are uncertain which type they are dealing with, they are likely to have
a subjective probability estimate that capitalists are, say, conditional investors. The
question is, How do workers form these subjective beliefs? Since workers cannot
observe capitalists preferences directly, they must draw inferences about the capi-
talists beliefs based on observed behavior. This involves the workers positing some
model about the way the world works that is summarized by the structure of a game
and a candidate equilibrium, and then formulating their beliefs about unobservables
(such as other actors preferences or social processes) based on observations that
occur during the game. For example, suppose that prior to their decision between
29 One tradition emphasizes how preferences are shaped by past and peer consumption (Pollak, 1978; Hayakawa
and Veniers, 1977; Kapteyn, Wansbeek, and Buyze, 1980; Becker, 1996). See Cohen and Axelrod, 1984, Raub, 1990,
Raub and Voss, 1990, Snidal, 1994, and Wildavsky, 1987, for approaches that emphasize the strategic implications of
preference formation. Elster (1982) emphasizes the psychological aspects of preference formation.
30 A particularly clear example is found in the literature on sectoral analysis, where the structural environment in
which sectoral actors operate is hypothesized to shape the economic policy preferences of private actors in ways that
help explain their propensity to engage in lobbying efforts (Shafer, 1994; Frieden, 1991; Rogowski, 1989).
31 See Cyert and DeGroot, 1975, 1980, Cohen and Axelrod, 1984, and Gerber and Jackson, 1993, for sophisticated
examples. Geanakoplos, Pearce, and Starchetti (1989) push this idea further in their discussion of psychological games
in which players payoffs depend not only on what the players do, but also on what they think.
wage restraint and militancy, workers had the opportunity to observe some behavior
of the capitalists which one type of capitalist (conditional investors, say) might be
more likely to engage in. If, for example, workers believed that conditional investors
are more likely to invest in the educational system in the home country than
unconditional disinvestors (because the expected rate of return on investments is
tied to the skill level of the home work force, but the expected rate of return on
foreign investments is not), workers beliefs at the time when they decide their wage
posture can be said to have been shaped by the decisions of capitalists with respect
to investments in the home country educational system.
Figure 4 shows the game tree for a game of limited information in which
conditional investors (C, center node, left side of extensive form) and unconditional
investors (U, center right) choose between investing (E) or not investing (~E) in the
home countrys educational system. After observing capitalists behavior workers
decide whether to engage in wage restraint (R) or increased militancy (M). Workers
uncertainty at the time of their decision is indicated by the dotted line connecting
FIG. 4. The Capital-Labor Belief Formation Game

their decision nodes. For example, at information set IS1, workers have observed a
pattern of investment in the home country educational system and believe capitalists
are conditional investors with probability p. Workers begin the game with a subjec-
tive probability estimate () that Nature has produced a state of the world in which
capitalists are conditional investors.32 The effect of capitalist behavior on the
formation of workers beliefs can be seen by comparing workers beliefs at the outset
of the game () and at the time they decide their strategy (IS1 or IS2). This is typically
done by solving the game using an equilibrium concept, such as perfect-Bayesian
equilibrium, that specifies strategy combinations that are mutual best responses and
the beliefs that are consistent with them. For example, given additional assumptions
regarding the capitalists preferences over outcomes,33 one equilibrium for the
game in Figure 4 is (E, ~E; M, R: 0, 1) where the equilibrium is read (conditional
investors strategy, unconditional disinvestors strategy; workers choice after ob-
serving ~E, workers choice after observing E: workers belief capitalists are condi-
tional investors after observing ~E, workers belief capitalists are unconditional
investors after observing E).
Bayes Theorem is used to calculate workers updated beliefs given the beliefs
they held at the beginning of the game, including the belief that capitalists are
conditional investors (prob(C)) and their inter-subjective understanding of how the
world works (i.e., a conjecture about what equilibrium is operative). For example,
workers updated beliefs after observing E are
prob C E =
af d i
prob C prob E C
d i probaCf probd E Ci + proba notCf probd E notC i.
Since the probability that the capitalist C at outset of the game is , and C is expected
to choose E in equilibrium (prob(E|C) = 1), it follows that
prob C E =
d i a1f +ba11f g0 = 1.
Thus, in this equilibrium, workers beliefs change from their initial uncertain
probability estimate 0 1 to a firm conviction that capitalists who invest in the
educational system are conditional investors.
This example suggests it is possible to comprehend changes in strategies, beliefs,
and (since all but first-order preferences can be treated as strategies) preferences
from the standpoint of agency-centered analysis. In this equilibrium, workers use a
combination of a set of expectations about the world and a set of observations to
change their beliefs about the type of capitalist they are interacting with. Workers
begin their interaction with the capitalist uncertain whether or not she is a condi-
tional investor, but are convinced by the capitalists investment in the educational
system that she is a conditional investor. Thus, if we began with the assertion that
workers at time t in country X have a preference for wage restraint in the sense that
it seems to be a relatively stable part of their organizational culture, we might explain
this preference by constructing a model that explicated the conditions under which
they can obtain their more basic goals (stable growth) by engaging in restraint
because of their belief that capitalists are conditional investors. Furthermore, we
can explain their beliefs by demonstrating the way these beliefs have evolved out of
32 Since our focus here is on changing beliefs, I have stated the outcomes at the terminal nodes in as general a way
possible. One could think of these outcomes as being those produced in equilibrium in the two games in Figure 2.
33 Specifically, that conditional investors prefer B to A and unconditional disinvestors prefer C to D.
historical patterns of behavior through which the classes have learned about each
others intentions. A similar story could be constructed to explain the behavior and
beliefs of capitalists, at which point we would have a subtle set of conjectures about
the inter-subjective understandings these concrete historical actors hold. Among
the contributions of game theory is that a number of different stories about the
beliefs and preferences held by the actors can be compared so as to produce a set
of hypotheses which, when tested, will allow us to determine which story is most
consistent with existing evidence.
Thus, preferences, understood as policy preferences, can be explained with the
technology of agency-centered theory. This is done by treating the preferred
outcome in question as a means to an even more primitive end (as wage restraint
was viewed as means to growth in employment), given additional assumptions about
the actors beliefs and the strategic environment in which the act makes the pursuit
of these means the strategic equivalent of the more primitive end.34
Note that any particular game-theoretic model and its equilibrium solution
involves statements about both agents and structures and that an equilibrium
solution reveals their mutual dependence. In the separating equilibrium to the
limited-information worker-capitalist game discussed above, the fact that capitalists
possess private information (they know what type they are but workers do not) is a
part of the asymmetric structural relationship between capital and labor. The
common conjecture captured in the equilibrium strategies (E,~E; M, R) constitutes
an inter-subjective understanding that follows from the fact that the agents have
some intrinsic properties captured by their preferences over outcomes and the
beliefs they holdincluding beliefs that change during the course of the game
in light of both their partners behavior and the strategic environment in which
their actions take place. Thus, the equilibrium concept used by agency-centered
theorists requires agents to understand the recursive relationship between agent
and structure.
The goal of this brief modeling exercise has been to demonstrate that (1) limited-
information game theory requires the analyst to make explicit statements regarding
the recursive relationship between agent and structure; (2) agency-centered analysis
can endogenize preferences over outcomes by treating them as second-order
preferences (i.e., means to more primitive ends); and (3) limited-information game
theory can provide insights into the formation of preferences by providing an
explanation of the process by which actors come to learn what their preferences are.
Note that this last mechanism goes beyond clarifying the difference between
preferences and strategies. In principle, any preference could be thought of as a
learned action that maximizes the satisfaction of a more basic goal, and Bayesian
decision theory could provide a rational choice explanation for why actors hold
particular preferences at particular times and how changes in their environment
can be expected to lead to changes in their preferences.35
34 In a similar vein, Long (1996) explains South Africas decision to denuclearize as the product of a complex
interaction between changes in strategic environment and the beliefs foreign policy makers held about who they were
and how South Africa fit into that environment.
35 Thus, one might explain a preference for a particular radio station by reference to the frequency with which
certain cherished musical values held by the individual in question (such as melodic inventiveness, rhythmic propulsion,
emotional complexity) are instantiated in the music that it plays and a change in tastes by exposure to different stations
(or musical styles) that more frequently deliver these values. Note that this approach to preferences also implies an
explanation for habitual behaviorindividuals adopt certain patterns of behavior (say, a route from home to office)
until they learn through Bayesian updating that other behaviors might better accomplish ones goals (Osborne and
Rubinstein, 1997). Given the cost of information collection and the possibility of risk aversion, such non-thinking,
habitual behavior is not necessarily irrational and is not incomprehensible from the standpoint of agency-centered
theory.
A Caveat on Methodological Individualism

The above discussion suggests that agency-centered institutionalists are capable of
contributing to a dialogue with structure-based institutionalists and structurationist
social theorists regarding the process of preference formation. It is possible,
however, that the agency-centered approachs commitment to methodological
individualism can serve as a continued wedge between these research communities.
This need not be the case, however, for most proponents of rational choice theory
adopt a form of methodological individualism that is sufficiently weak to make it
unobjectionable to many structure-based and structurationist thinkers.36 This is
particularly the case if methodological individualism is understood in an inter-
temporal framework.
The weak form of methodological individualism assumes that human beings are
supposed to be the only moving agents in history and that if sociological holism
means that some superhuman agents or factors are supposed to be at work in
history (Watkins, 1959:505, as quoted in Lukes, 1968:121), it cannot be supported
by logic and evidence. Thus, there is no argument here that institutions, or social
structures in general, do not matter. Rather, they matter because of the ways they
reflect, refract, restrain, and enable human behavior (Giddens, 1984). As Watkins
says, we shall not have arrived at rock-bottom explanations of such large-scale
phenomena until we have deduced an account of them from statements about the
dispositions, beliefs, resources and inter-relations of individuals.37 In contrast, a
strong version of methodological individualism would hold that sociological laws
referring to social entities are reducible to theories referring only to individuals
(Kincaid, 1986:493) and is clearly incompatible with institutional analysis (Udehn,
1996).
Methodological individualism has been criticized by both structure-based insti-
tutionalists and adherents of structuration theory. Structure-based theorists argue
that if institutions can be reduced to the goals and beliefs of the actors who inhabit
them, they are epiphenomenal (Grafstein, 1992; Krasner, 1988). The structuration-
ist argument against ontological reductionism is that if all other entities posited by
a theory can be reduced to a particular entity, then that entity cannot be explained
by that theory.38 Thus, frameworks that privilege individuals over social structures
will be unable to explain the properties and causal powers of their primary units
of analysis (Wendt, 1987:337).
A key part of the structure-based argument against methodological individualism
is that institutions are not reducible to the individuals who inhabit them. Institutions
do not necessarily reflect the preferences and capabilities of individual actors
(Krasner, 1988:68). This is true, but it does no harm to methodological individual-
36 Udehn (1996) terms this weak version institutional individualism and associates it with Popper (1945, 1957) and
his students Agassi (1960) and Watkins (1953). The other way in which methodological individualism is linked to rational
choice theory is through the work of Kenneth Arrow, who demonstrated that collective decisions are irreducible to
individual decisions and must therefore be explained. That is, we may say that labor union x or firm y did thus and so,
but what we mean is that some decision process within that organization has resulted in a corporate decision to do thus
and so. Since Arrow demonstrated that there is no decision rule that unambiguously maps the preferences of individuals
within an organization to group decisions, the decision process within the firm is itself in need of explanation. This, of
course, does not mean that every research attempt must trace the decision process back to the individuals; most rational
choice theorists are quite comfortable assuming that this or that organization acts as if it were a unitary actor. What
is important is that such a reduction to the beliefs and preferences of individuals is potentially possible.
37 Watkins, 1959. As noted above, this is the position adopted by Elster (1989).
38 In the context of the agent-structure debate, Wendt maintains that this situation can be prevented by adopting
an approach to the agent-structure problem which does not preclude a priori making both agents and structures
problematic or dependent variables (1987:337).
ism. To understand why, one needs to adopt a diachronic approach to the relation-
ship between individuals and institutions.39
When agency-centered institutionalists maintain that the explanations of social
behavior are not complete until they are traced to the actions of individuals they
are not arguing that institutions, as they exist at any point in time-space (Thrift,
1983), are explainable in terms of the individuals who exist in that time-space.
Rather, they are arguing that, in principle, those institutions should be explained
as the products of the behavior of some individuals if they are to be considered to
have been explained. For example, the attributes of a party system at time t cannot
be fully explained by the goals and beliefs of voters and politicians at time t if they
are to retain any independent causal significance. The chicken and the egg problem
exists only in an analytically contrived static picture. A two-party system exists at
time t because voters and political entrepreneurs chose not to create or support
third-party alternatives at time t 1. If large portions of the electorate are confronted
with the choice of voting for, say, the candidates of two parties they find less palatable
than their ideal candidate because they believe the electoral prospects of their
ideal candidate are extremely poor due to the first-past-the-post electoral system,
their behavior is being shaped by (and, in fact, reproduces) institutional structures
that have been, to paraphrase Marx, inherited from the past (Marx, 1963; Riker,
1986).40
The institutions of today are shaped by the (contextually bound) actions of
individuals in the past. These institutions shape the actions of individuals today,
which, to a greater or lesser extent, shape the institutions of tomorrow.41 In this
sense, structurationists are correct in arguing that the structural properties of social
systems are both medium and outcome of practices they recursively organize
(Giddens, 1984:25). Contra Grafstein (1992), weak methodological individualism
does not compel agency-centered institutionalists to deny that institutions are
real, or that they are mere epiphenomena that either (a) can be changed whenever
the goals and desires of powerful individual actors change42 or (b) are manifesta-
tions of the psychological states of social actors (Grafstein, 1992). Rather, like Wendt,
agency-centered theorists argue, A solution to the agent-structure problem . . .
engages in reification when it objectifies social structures without recognizing that
39 Some structuralists and/or structurationists might resist the historicist implications of a diachronic approach.
Smith (1984) points out the static tendencies of structural linguistics, a field that has inspired much structuralist and
structurationist thought.
40 Similarly, Giddens maintains that the flow of action continually produces consequences which are unintended
by actors, and these unintended consequences also may form unacknowledged conditions of action in a feedback fashion"
(1984:27). Most rational choice institutionalists would defect from this statement only by qualifying unintended with
the word often or sometimes. It has been argued that rational choice theory cannot address the question of
unintended consequences. This is a curious notion since a central part of Adam Smiths analysis is that important
attributes of markets arise as unintended consequences. Similarly, Hayek (no stranger to individualism, methodological
or otherwise) argues that understanding the unintended or undesigned results of the actions of many men (1955:25,
as cited in Udehn, 1996:167) is the central task of the social sciences. The notion that rational choice theory cant address
unintended consequences derives from a misunderstanding of the logic employed in choice-theoretic attempts to
explain institutions. Choice theory assumes that (a) institutions arise as a consequence of individual actions and that
(b) human behavior is largely intentional. It does not follow that the institutions that result from these choices are
necessarily, or even predominantly, reflections of the intentions of individuals. This is true for two related reasons: first,
individual decisions often occur under conditions of great uncertainty; and second, institutional change is typically the
result of the choices of many actors and, hence, individuals may find it difficult to predict how their actions combine to
produce institutional outcomes (Przeworski, 1991). Finally, attempts at goal attainment often create consequences that
are external to the decision calculus of the actor. (This is, in fact, Adam Smiths argument about the global efficiencies
in market behavior created by self-interested actors.) In the words of Anthony Giddens, human history is created by
intentional activities but is not an intended project (1984:27).
41 See Carlsnaes, 1992, for a clear application of this form of reasoning to foreign policy analysis.
42 See Garrett and Lange, 1995, for an approach that explains institutional stickiness.
only human action instantiates, reproduces, and transforms those struc-

tures(1987:345).43
Conclusions
The Agent-Structure Debate has become increasingly influential in social theory
and international relations theory. A central goal of this paper has been to demon-
strate that existing approaches to the study of domestic political institutions have
also had to wrestle with ontological questions and that distinct approaches have
developed out of the answers they have arrived at. Structure-based institutionalists
have emphasized the ways in which institutions shape the preferences actors hold,
while agency-centered institutionalists have typically treated preference forma-
tion as outside their domain and focused on the ways in which actors pursuit of
their goals aggregate into social outcomes. Structurationists have argued persua-
sively that an adequate understanding of social behavior is not likely to be obtained
from such a division of labor. It will not do to explain the complex interdependen-
cies of structure and action by assigning the parts of the puzzle to two different
schools. Progress is to be made by creating frameworks for discussion across schools
that aim at problematizing both agent and structure. Central to the problem is
the difficult question of what drives human behaviorwhere do preferences come
from? Without making a claim that it is the only or best approach, I have tried to
suggest how agency-centered theorists might contribute to answering this question.
If a weak form of methodological individualism is adopted, one I believe is consistent
with the writing of leading structurationists, agency-centered theory can proble-
matize second-order preferences. There is, therefore, no technological reason
agency-centered theorists cannot contribute to the task of endogenizing prefer-
ences. Finally, while not a central focus of the paper, there has been an attempt to
separate the practice of agency-centered theorists from the perception that they are
part of what Wendt refers to as the hegemony of empiricist discourse(1987:370).
Many of the practices of agency-centered theorists are more consistent with scientific
realism than empiricism.
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International Studies Quarterly (1998) 42, 245270

Agents and Structures:

Two analytically distinct approaches to the study of domestic politics have

The most visible difference between agency-centered and structure-based ap-

Agents, Structures, and Preferences in Institutional Analysis

Rarely do we find a direct and obvious relation between economic

1976:34). The logical structure of the argument is as follows:

as it were, through the societys institutional endowment. (Empha-

The Structure-Based Critique of Exogenous Preferences

expression of those interests (Hall, 1992:107) can have controversial implications

Instead, structure-based institutionalists have reached the conclusion that agency-

Toward an Agency-Centered Approach to Endogenous Preferences

model of the process of class compromise in Western European democracies. It

FIG. 1. Wage RestraintInvestment Game

productivity and wages in the long run.

FIG. 2. Equilibrium Behavior in Wage RestraintInvestment Game

preferences is only one of them. As the example here demonstrates, it is entirely

out changes in preferences. The agency-centered approachs position regarding

FIG. 4. The Capital-Labor Belief Formation Game

A Caveat on Methodological Individualism

only human action instantiates, reproduces, and transforms those struc-

theory that is consistent with a weak form of methodological individualism.

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